The RBI said on Thursday it will buy and sell bonds in a special operation this month, leaving traders wondering if it is attempting to partially monetise government debt – but giving the benchmark bond its biggest one-day rally in nearly six months.
The RBI said it will simultaneously buy and sell 100 billion rupees each of government securities in auctions on April 27 as part of its Open Market Operations, buying back longer-tenor bonds and selling short-term cash management treasury bills.
While the RBI earlier this year conducted similar “twist operations”, Thursday’s announcement raised eyebrows as the RBI will now be selling T-bills it sold in an auction a day earlier, in what traders say is a clear indication the RBI itself bought a large chunk of that offering.
“The RBI seems to have used this two-step process instead of a direct private placement of part of the government’s borrowing programme with itself,” experts said.
With government revenues slumping amid the coronavirus crisis and New Delhi outlining a huge stimulus programme to help the poor amid a 40-day nationwide lockdown, some economists and bankers have speculated that the government would have to turn to the RBI to monetize a portion of its deficit.
The RBI and Finance Ministry have remained silent on the issue, leading to doubts in the markets about the government’s borrowing programme in recent weeks and leading yields to spike on concern the market may have to mop up much larger than anticipated borrowings.
The benchmark 10-year bond yield rose to 6.51% earlier in the month despite a big interest rate cut on March 27.
On Thursday, yields dropped as much as 21 bps to 6.01% after the OMO announcement, as traders interpreted the move as indirectly signalling the RBI’s intention to monetize part of the government’s deficit.
While the OMO announcement was a big positive for markets, traders said they wanted the RBI to be more transparent.