RBI announces special Open Market Operations to push bond yield

After rejecting all bids under Open Market Operations (OMO) on 24th September 2020, the Reserve Bank of India (RBI) has announced a special OMO. The Central Bank of India has decided to conduct simultaneous purchase and sale of government securities under Open Market Operation (OMO) for an aggregate amount of Rs 10,000 crore each on October 01, 2020. According to industry insiders, the step aims to push bond yield in India and expected that RBI will continue to do this in future too.

The RBI informed about its decision in a written press statement and said, "On a review of the current liquidity and financial conditions, the Reserve Bank has decided to conduct simultaneous purchase and sale of government securities under Open Market Operation (OMO) for an aggregate amount of Rs 10,000 crores each on October 01, 2020." The RBI went on to add that it will sell shorter dated securities with less than one year maturity and purchase longer dated securities with tenures of 5, 7 and 9 years.

Eligible participants should submit their bids/offers in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system between 10:00 am and 11:00 am on October 01, 2020. The result of the auctions will be announced on the same day and successful participants should ensure availability of funds/securities in their Current account/SGL account, as the case may be, by 12 noon on October 05, 2020.

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Speaking on the RBI action Jyoti Roy, Deputy Vice President — Equity Strategist at Angel Broking said, "This is in line with our expectations that the RBI will use unconventional tools in order to bring down the longer end of the yield curve given the very high spread of  near 200bps between the overnight rate and the 10 year G Sec rate. We expect the RBI will keep selling shorter dated securities and buying longer dated securities going forward in order to bring down longer term rates especially given that rates cuts are off the table in the near future given very high CPI inflation of 6.69 per cent for Aug’20, which is well above the RBI’s comfort zone of 4 per cent."

The bond market is expecting the Reserve Bank to absorb the excess supply of government papers since this is the first time in six months that the central bank is going for an outright purchase of bonds.