RBI's Operation Twist in progress: Who will eventually benefit?

The third leg of 'Operation Twist', under which the RBI buys long-term bonds and sells short-term government securities (G-Secs) simultaneously, happened on January 6.

The RBI bought bonds worth Rs 10,000 crore and sold bonds worth as much. Since the operation was first announced on December 19, 10-year G-Sec yields have fallen by 19 basis points from 6.746 percent to 6.551 percent. So far, in three tranches of 'Operation Twist', the RBI has bought bonds worth Rs 30,000 crore and sold Rs 25,326 crore worth of securities.

Bond dealers say yields haven’t fallen as much as the market was expecting them to, despite three rounds of auctions by the central bank. “The yields haven’t fallen much partly because of the ongoing US-Iran tensions,” said a treasury dealer requesting anonymity since he is not authorized to talk to media.

This means that means the RBI will have to intervene more, periodically, if yields have to fall further. Treasury dealers say the 10-year G-Sec yields could ease by another 10 basis points from the current level to around 6.45 percent.

Who benefits from the exercise really? Market is still speculating on what this could mean for different stakeholders. The government will certainly benefit if the whole exercise lowers the bond yields so that the overall cost borrowing for the government comes down. This will come in handy for the government if it has to borrow more from the market in this fiscal or the next. The government is walking a tight rope on fiscal deficit management.

“Next financial year, the market expects government to borrow more. If the RBI does this exercise on a sustainable basis, this will bring down the overall cost of borrowing for government,” said SV Sastry, MD and CEO, SBI DFHI.

According to traders, another beneficiary to the Operation Twist will be the banks that are actively participating in the process of buying short-term bonds from the RBI. The RBI is allowing these banks to buy short-term securities, selling long term bonds. That way, banks can redeem these bonds after a year and invest in productive lending purposes if they choose to, and provided there is a pick up in demand.

But, revival in credit growth is unlikely next year unless both domestic and global economies rebound. There are no strong signals of growth rebound yet. Liquidity is not a concern for the banking sector at this point, but a lack of demand from quality borrowers is. But, the RBI has given a leeway for banks to free up some money after a year if the need arises.

Operation Twist is unlikely to benefit the corporate bond market, dealers say, citing the growing caution among investors and higher risk aversion in the present economic scenario. Investors would rather prefer lesser gains from sovereign bonds rather than try their luck in corporate bonds.

To conclude, the government is likely end up as the bigger beneficiary for 'Operation Twist'. It is unclear till now whether it will borrow more in the second half of this fiscal or choose to cut expenditure. The latter is not advisable in a slowing economy. But next year, when the government is expected to go for higher borrowing, 'Operation Twist' is likely to help the government to lower its overall cost.

(Data contributed by Kishor Kadam.)