HYDERABAD: As part of its liquidity management operations, the RBI will sell Rs 10,000 crore worth of short-term bonds and buy an equal amount in long term bonds in a move being informally called Operation Twist.
Next Monday, the central bank intends to sell four bonds in the secondary market, which will mature between June 16, 2020 and April 15, 2021. In parallel, RBI will buy four bonds maturing between January 11, 2026 and May 9, 2030.
With banks parking over Rs 7 lakh crore surplus liquidity with the central bank, against which it has to issue bonds as security, the RBI seems to be replenishing short-term bonds with long tenor securities.
According to Suyash Choudhary, Head of Fixed Income, IDFC AMC, deficit monetisation seems unavoidable due to the anticipated sharp decline in revenues and need for discretionary expenditure expansion. Estimates say the combined (Centre + states) fiscal deficit is likely to cross 10 per cent of GDP in FY21.
"There has been a strong case for the RBI beginning to outright monetise the fiscal deficit given the exceptional growth challenge that the world and India is currently facing. Our base case is for India’s nominal GDP growth of just 3-4 per cent for the current financial year. If true, this will be the largest growth shock in multiple decades," he said.
He added that the bond market will now be significantly comforted that a financing plan is beginning to emerge. “Term spreads at the mid-long end of the curve have been the highest in the past 10 years, and significantly higher compared to the expected nominal GDP growth rate for FY21. These should now compress, provided that the total size of RBI measures turn out to be meaningful in relation to the government’s financing requirements,” he said.