Operation Twist by RBI – Economics

Table of Contents

CURRENT AFFAIR

The Reserve Bank of India decided to conduct its version of ‘Operation Twist’ through simultaneous purchase and sale of government securities under Open Market Operations (OMOs) for Rs 10,000 crore each.

Operation Twist is the name given to a US Federal Reserve monetary policy operation.
It involves the purchase and sale of government securities to boost the economy by bringing down long-term interest rates.

In 1961, the John F Kennedy administration proposed a solution to revive the weak economy through lower longer-term interest rates while keeping short-term interest rates unchanged.
This initiative is now known as ‘Operation Twist’ which was employed by the US Fed.
The Fed then implemented it again in late 2011 and 2012 to stimulate the economy hit by the global financial crisis.
In December 2012, the Fed ended the programme and replaced it with another policy of “quantitative easing”.

The RBI slashed repo rate by 135 points to 5.15% this year but banks passed on only part of it.
It is keen that long-term rates are brought down to kick start investment and revive the economy.
The idea is that business investment and housing demand were primarily determined by longer-term interest rates.

The central bank has decided to purchase Rs 10,000 crore worth of one security – the 6.45% GS 2029. This is a long term 10-year bond.
When the RBI purchases 6.45% bond on December 23, demand is expected to rise, leading to lower long-term yield.
On the sell side, it has proposed to sell four short term securities which will mature in 2020for a total of Rs 10,000 crore – 6.65% GS 2020, 7.80% GS 2020, 8.27% GS 2020 and 8.12% GS 2020.

Open market Operations (OMOs) are the market operations conducted by the RBI by way of sale and purchase of G-Secs to and from the market.
OMOs are done with an objective to adjust the rupee liquidity conditions in the market on a durable basis.