Barclays says ‘Operation Twist’ may be antidote for India’s steepening curve

By Kartik Goyal

The Reserve Bank of India may have the perfect tool at its disposal to slow the relentless steepening in the nation’s yield curve without adding to its growing balance sheet, according to Barclays Plc.

Operation Twist, where the central bank buys longer-maturity bonds while simultaneously selling short-term debt, is being touted as a solution. The RBI could announce operations worth 1 trillion rupees ($13.3 billion), Barclays said.

Calls for the RBI to backstop the debt market grew after Prime Minister Narendra Modi’s administration announced plans on Friday to increase borrowing by half to cope with the economic impact of the coronavirus. Debate over the most effective options for the central bank has become the favorite talking points among bond traders.

“The RBI could absorb duration without adding net liquidity by more special open market operations,” said Ashish Agrawal, head of FX and EM macro strategy research at Barclays in Singapore, referring to the Twist operations.


So far, the central bank has conducted five such operations worth 500 billion rupees since it introduced them in December. Other tools at its disposal include just buying debt in the secondary market, increasing banks’ limits for buying bonds and a rate cut.

While the central bank has sought to cap borrowing costs by cutting policy rates, the spread between the nation’s two-year and 10-year bond yields have been widening since January.

The spread touched 173 basis points on Monday, the most in a decade after traders realized that 10-14 year bonds will make up half of the government’s expanded 12 trillion rupees borrowing, from about 36% earlier.

The government plans to sell 300 billion rupees of bonds on Friday, the first sale after it raised the total annual borrowing last week. Two of the three notes in Friday’s auction have a tenor of more than 10 years.

“The RBI is expected to reveal its hand soon enough to support the financing of the deficit,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. in Mumbai. “It may very well take the form of an indirect intervention for now, for instance through extension of the last twist operation.”