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Government security (G-Sec) yields thawed a shade on Wednesday on hopes that the Reserve Bank of India (RBI) will not shy away from conducting open market operations (OMO) to keep the yields from rising.
The central bank, on Wednesday, announced that it will conduct a special OMO, entailing simultaneous purchase and sale of G-Secs aggregating ₹15,000 crore eachon March 4.
Yield on the benchmark 10-year G-Sec (5.85 per cent GS 2030) nudged down about 2 basis points (to 6.1473 per cent), with its price increasing by 18 paise (₹97.83) over the previous close. Yield and price of bonds are inversely related, moving in opposite directions.
Since January-end 2021, yield on the aforementioned G-Sec has jumped about 24 basis points and its price declined by about ₹1.75.
Due to the fall in G-Sec prices, banks are staring at mark-to-market (MTM) losses in the fourth quarter. If the losses persist till the end of the quarter, they will have to make provision towards investment depreciation. This could have adverse implications on their profitability.
“This financial year, that is 2021 from April till now, we have done a total open market operation (OMO) of more than ₹3-lakh crore.
“Considering the borrowing requirement of next year, there is no reason why the RBI should do less OMO in the next year, that is 2021-2022, than what we did in the current year,” the RBI Governor Shaktikanta Das told a news channel.
Das reiterated that orderly evolution of the yield curve is a public good, and it entails a responsibility both for the central bank and for market players.
Under the special OMO (also known as Operation Twist), the RBI will purchase four G-Secs (maturing in 2024, 2027, 2031 and 2035), and simultaneously sell two G-Secs (maturing in November 2021 and 2022) aggregating ₹15,000 crore each on March 4.
The central bank is trying to soften the yields on G-Sec at the longer end via Operation Twist. This will ensure that the cost of borrowing for the government as well as India Inc is reasonable. G-sec yield curve serves as a benchmark for the pricing of corporate debt instruments
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