Jyoti Roy, DVP - Equity Strategist, Angel Broking Ltd
Keeping in mind the current liquidity and financial conditions, the Reserve Bank has decided to conduct simultaneous purchase and sale of government securities under Open Market Operation (OMO) for an aggregate amount of ₹10,000 crore each on October 01, 2020. The RBI will sell shorter dated securities with less than one year maturity and purchase longer dated securities with tenures of 5, 7 and 9 years. This is in line with our expectations that the RBI will use unconventional tools in order to bring down the longer end of the yield curve given the very high spread of ~200bps between the overnight rate and the 10 year G Sec rate. We expect the RBI will keep selling shorter dated securities and buying longer dated securities going forward in order to bring down longer term rates especially given that rates cuts are off the table in the near future given very high CPI inflation of 6.69% for Aug'20 which is well above the RBI's comfort zone of 4.0%.