Benchmark 10-year bonds rallied from near a three-month low after the central bank said it will buy 100 billion rupees ($1.4 billion) of longer-tenor bonds while selling shorter debt in a move reminiscent of the US Federal Reserve’s Operation Twist.
The yield on the 2029 debt fell as much as 16 basis points to 6.59%, the most in more than two months, making it Asia’s top performer. The 7.57% 2033 yield also slid 20 basis points. Yields on the 6.35% 2020 bond — a very short-end paper — jumped 20 basis points.
The move had been suggested by some traders and strategists as a way to pass on more of the central bank’s five rate reductions this year to businesses and individual borrowers. With investment and consumption both weak in India, policy makers are trying to spur credit and lift growth from a six-year low.
“The relentless steepening of the yield curve is getting pacified by the RBI coming in and signaling ‘I am here to support,’” said Lakshmi Iyer, chief investment officer for fixed income at Kotak Mahindra Asset Management Co. in Mumbai. “This move brings some sort of a sanity check.”
The Reserve Bank of India in a statement late Thursday said it will buy 100 billion rupees of the 2029 debt and sell an equal amount of notes maturing next year in an auction on Monday.
The concept is similar to Operation Twist used by the Fed in 2011-2012 in an effort to cheapen long-term borrowing and spur bank lending. The Fed then swapped short-term Treasury securities for longer-term government debt, which reduced the gap between two- and 10-year yields.
In India, the difference between the benchmark 10-year yield and the RBI’s policy rate was 160 basis points before the announcement. That’s way higher than the average spread of 55 basis points seen during the 2015-2017 easing cycle, according to Deutsche Bank.
The steepening of the curve in the longer end reflects concerns about the government adding to record borrowing as it gets ready to prime the economy. The slowdown has reinforced doubts about the administration meeting its budget aim of 3.3% of GDP this fiscal year.
“The RBI should increase the intensity of its Operation Twist via more vigorous switches of government bonds focused on securities in the tenure of 7-10 year plus,” said Madhavi Arora, economist at Edelweiss Securities Ltd.
Future operations will depend on the success of Monday’s auction, traders say.
“There’s limited appetite for short-end bonds so the RBI will need to offer higher yields,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership.
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