The Reserve Bank of India (RBI) has decided to conduct simultaneous purchase and sale of government securities (G-Secs) under Open Market Operation (OMO) for ₹10,000 crore each on August 27and September 3,in a bid to tame G-Sec yields, which jumped almost 24 basis points in the last six trading sessions.

This announcement seems to have had the intended effect, with the yield on the benchmark 10-year G-Sec immediately softening about 5 basis points. One basis point is equal to one-hundredth of a percentage point.

Under the OMO to be conducted on August 27, the central bank will purchase four G-Secs – G-Sec maturing in 2024, carrying a coupon rate of 6.18 per cent (6.18 per cent G-Sec 2024); 8.24 per cent G-Sec 2027; 5.79 per cent G-Sec 2030; and 7.95 per cent G-Sec 2032 – for ₹10,000 crore.

Simultaneously, RBI will be selling four 182 Day Treasury Bills, maturing on October 15, October 22, October 29, November 6, 2020 for ₹10,000 crore.

Rise in retail inflation

The spike in G-Sec yields in the last few trading sessions came in the backdrop of rise in retail inflation and the RBI leaving the repo rate in the last policy review.

Bond market expert K Boovendran said the OMO auction will help cool the G-Sec yields, which spiked in the last few trading sessions. The move to sell 182-Day Treasury Bills will ensure that the liquidity that will be released due to purchase of G-Secs by RBI is neutralised, he added.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “The market was anxiously waiting for Operation Twist (RBI selling treasury bills and buying government securities).

“Impact-wise yields declined by 4 to 8 basis points on the curve. Going ahead, the market expects more OMOs else yields will drift again towards 6.20 per cent due to heavy supply of G-Secs.”

The securities for the second tranche auction (purchase and sale of G-Secs under OMO for ₹10,000 crores each) on September 3 will be announced separately, the central bank said in a statement.