Operation Twist: RBI to hold next round of simultaneous purchase & sale of government securities on Feb 25

The Reserve Bank of India (RBI) on Monday said it would carry out simultaneous purchase and sale of government securities (G-Secs) worth Rs 10,000 crore on February 25. These operations, often referred to as Operation Twist, follow the central bank’s OMO purchases on February 10.

“On a review of current liquidity and financial conditions, the RBI has decided to conduct simultaneous purchase and sale of government securities under open market operations (OMO) for an aggregate amount of ₹10,000 crore each on February 25, 2021,” the RBI said in a notification on Monday.

Over the past one week, the central bank has taken a series of measures to keep yields under control. In Friday’s Rs 26,000-crore auction, it had decided to devolve Rs 6,736 crore of the 6.22% government stock 2035 upon primary dealers as it was unwilling to let yields rise to the levels demanded by the market. On Thursday, it held a special auction of
G-Secs to drive yields below 6%.

After this month’s monetary policy review, yields had surged in the absence of an OMO calendar. RBI governor Shaktikanta Das had sought to allay the market’s fears on the winding down of easy liquidity conditions. He had described last month’s hardening in money market rates and G-Sec yields as the outcome of perceived market misconceptions about the RBI reversing its accommodative policy stance.

At the same time, experts say the central bank may not have it as easy as last year when it comes to the smooth conduct of the government’s borrowing programme.

In a recent report, economists at Crisil observed that in pandemic-hit 2020, yields strayed from fundamentals and drooped to decadal lows despite a record rise in government borrowing. “The counter-intuitive happened because of extraordinary easing moves by both, the Reserve Bank of India (RBI) and global central banks. This year will be different, though,” the report said.

There are two reasons behind it. The first is that economic recovery is gaining momentum and that implies a pick-up in credit growth. Banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields. Secondly, the RBI will have to keep an eye peeled for inflation amid an expansionary fisc and rising input costs, though in general, inflationary pressures are expected to remain under control.