Mumbai: Long-duration and dynamic bond funds are likely to be the biggest beneficiaries of the Reserve Bank of Indias (RBI) surprise decision to emulate the Federal Reserves Operation Twist.RBI on Thursday said it will conduct a simultaneous sale and purchase of bonds, in a move seen by market participants as an attempt to bring down long-term yields.The long-tenor funds category was witnessing a lot of heat because of fiscal deficit overshoot.
That category has been a big winner of yesterdays RBI announcement.
Dynamic bond funds may be a better bet too, said Lakshmi Iyer, Chief Investment Officer for Fixed Income at Kotak Mahindra Asset Management.The central banks measures over the last six months to boost liquidity in the system gas resulted in a significant rally in short-term bonds.'Operation Twist'20 Dec, 2019The Reserve Bank of India will conduct a simultaneous sale and purchase of bonds, it said on Thursday, in a move seen by market participants as an attempt to bring longer-term yields lower.
It is the first time RBI would be conducting a special OMO of this kind, similar to the 'Operation Twist' carried out in the US near the start of the decade.
What has RBI announced?20 Dec, 2019The central bank said it would buy government securities (G-Secs) with a 10-year maturity while, at the same time, sell government bonds with just one-year maturity both worth Rs 10,000 crore each on Monday.
What is Operation Twist?20 Dec, 2019Operation Twist is the name given to a monetary policy tool that the Jerome Powell-led US Federal Reserve had started to influence the rate of interest in the worlds largest economy.
The process involves buying and selling of both short- and long-term government bonds depending upon its objective relating to rates at the same time.
The method was later adopted by several other central banks.
Why this move by RBI?20 Dec, 2019Economists have been expecting the central bank to launch this special manoeuvre so that rate cuts by it since February this year could lead to a commensurate drop in the rate of interest in the economy.
Although RBI has cut interest rate five times this year by a total of 135 basis points, the yield on the 10-year G-Secs has come down by only 80 bps from 7.55% in early-February to its Thursdays close of 6.75%.
Even less has been the drop in rate of interest that banks charge to their borrowers.
So, how will it work?20 Dec, 2019On December 23, RBI will buy 10-year GSecs worth Rs 10,000 crore and, on the same day, it will also sell one-year bonds of four varied tenures worth Rs 10,000 crore in all.
Since the price of a bond and the yield on it move in opposite directions, buying of a bond pushes up its price and pulls down the yield.
By buying 10-year bonds, RBI wants to bring down the benchmark yield one of the main determinants of the rate of interest banks charge their borrowers.
The liquidity was huge, and the rate of transmission happened on the shorter end.
Fiscal worries also kept the long-term rates elevated, said Devang Shah, deputy head- fixed income at Axis Mutual Fund.This should lead to flattening of the curve, whereby long bonds should rally for some time.
Funds with allocation to longer-tenor bonds will benefit in the near term, which include dynamic bond funds, he added.According to Dwijendra Srivastava, CIO- fixed income, Sundaram Mutual Fund, if RBI keeps on doing such OMOs as per their pattern, it may continue to benefit the 10-year bonds.Long-duration funds will benefit, but it also raises the question whether it will sustain as fiscal situation is not comforting.
So, while we will see the benefits in the near term, we need to see how future OMOs play out, Srivastava added.It will be the first time on December 23 when RBI will be conducting a special open market operation (OMO), similar to the 'Operation Twist' carried out in the United States near the start of the decade.RBI in a release on Thursday said that on a review of the current liquidity and market situation and an assessment of the evolving financial conditions, it has decided to conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for Rs 10,000 crore each on December 23.