Under the open market operation programme of RBI, the central bank will make simultaneous sales and purchases of government securities. The aim of the move which is being called as ‘operation twist’ is to encourage the shorter-term interest rates, while discouraging the long-term rates in order to manage yields in the market.
RBI said on June 29 that it “will buy Rs 10,000 crore in longer-dated government bonds, while selling an equivalent amount in shorter-dated treasury bills, the central bank”. The auction will be held on July 2.
The central bank will purchase – 6.79% GS 2027, 7.26% GS 2029, 6.68% GS 2031 and 6.57% GS 2033. While it will sell 182-day t-bills due Oct. 15, 2020, 182-day t-bills due Oct. 22, 2020, 364-day t-bills due April 22, 2021, and 364-day t-bills due April 29, 2021.
Currently, short term loans are very low as a surplus of liquidity has been looking for shorter-dated assets. Profits on 182-day and 365-day treasury bills during the last week slumped to record lows. 91-day t-bill yields came close to all-time lows while in some cases, these rates have gone down even below the RBI’s reverse repo rate of 3.35%. The shorter-dated bonds of state governments and corporates also experienced a decline in short-term interest rates.
On the other hand, long term rates continued to remain high. This is because investors have concerns about the volatility in longer-dated assets.