In yet another kahaani mein twist, (first one being the Monetary Policy Committee's status-quo on rates), the Reserve Bank of India has announced the domestic version of 'Operation Twist' in Indian Government Bonds (IGB).
Under this operation, the RBI will sell Rs 10,000 crore of up to one-year IGBs and buy a similar amount of 10-year IGBs on December 23 2019.
While the size of this operation is small, it is very likely that more tranches may follow.
Why the “twist”The government bond yield curve is amongst the steepest in the world and after status-quo on rates, the steepness only enhanced further, especially in the one-ten year segment.
The repo rate currently is at 5.15 percent and the 10-year government securities (G-Sec) yield was trading ~6.75 percent in pre-announcement of ‘Operation Twist’. This could be one of the key reasons behind the move.
Markets have reacted favourably to this announcement. It will also likely address concerns around the transmission of credit from the banking sector to the realty sector over the medium term.
From the macro view, growth continues to be a challenge, which may mean some leeway could be exercised on the fiscal front. Markets were worried about potential excess government bond supply if there were to be a breach on the fiscal front.
Those concerns would now be eased a tad as RBI stands set to buy long bonds via this mechanism. Thus it will also help the government navigate its fiscal challenges.
Liquidity in the banking system continues to remain very comfortable, which will offer an anchor to the short-end of the curve.
However, we could see some inch up in very short tenor bond (3m-12m) as the RBI is set to supply G-Sec in this segment. The uptick may not be material due to the available liquidity cushion.
We continue to maintain a constructive bias on fixed income-oriented funds. The rate cycle in India is likely to remain benign in the near to medium term. The case for ownership in fixed income strategies therefore continues.
The author is Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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