Bond yields in India are up 6.16% as RBI resumes its “Federal Reserve Style Operation Twist”.

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Indian bond yields of 5.79% for 2030 bonds rose to 6.16% after the announcement.
The panic reaction of investors is influencing the price increase of Indian bonds.
The central bank bought Rupees 100 billion ($1.3 billion) worth of bonds and sold a corresponding amount of shorter-term debt.

This Wednesday, the Reserve Bank of India announced that in two special operations it will buy and sell longer tenor bonds in two tranches. Following the announcement, yields on bonds rose by seven basis points from 5.79% to 6.16% by 2030. It is important to note that the latest benchmark of 5.77% in 2030 fell by four basis points before rising by 30 basis points in the last three weeks.

The central bank bought bonds worth 100 billion rupees ($1.3 billion) and sold a corresponding amount of shorter-term debt on August 2, 2020.

The RBI follows a special OMO – similar to the Federal Reserve-style “Operation Twist”, in which bonds with longer maturities are bought and bonds with shorter maturities are sold for the same equivalent amount. The bank will carry out another special operation on August 27, 2020 and September 3, 2020.

So far, RBI has carried out five such operations since January, worth Rs. 500 billion since it introduced them at the end of last year. Other instruments that the central banks intend to use include the purchase of debt instruments on the secondary market, raising the limit for the purchase of bonds by the banks and lowering interest rates.

The panic reaction of investors has had a huge impact on bond yields

In India, bonds rose after the RBI announced that it would resume its Fed-style “twist to cool” operation after two open market operations and a rise in yields due to inflation.

India’s yield curve steepened two months ago after the RBI did not announce any discrete bond purchases for several weeks, despite the government’s record of Rupees 12 trillion in bond sales in the current fiscal year.

However, the RBI’s recent action has further calmed the markets and increased bond yields, and it must remain constant with the announcement of special open market operations.

Pankaj Pathak, debt fund manager at Quantum Asset Management Ltd. in Mumbai, said

“This was to be expected given the panic reaction that led to an increase in yields in the last two sessions following Friday’s auction. RBI needs to make its OMO announcements more frequently in view of the enormous supply,” says Pankaj Pathak.

Market tensions became more evident after the sale of the 10-year benchmark debt on August 14, 2020 had to be rescued by investors. Bond yields rose much more than expected during last week’s auction of longer bonds, leaving traders and investors wondering whether the central bank has hinted that yields could rise higher.

The RBI’s “Operation Twist” could be the antidote to India’s steepening curve, but first we keep our fingers crossed and see how the country’s economy performs before the year ends.

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