Operation Twist by RBI

RBI has launched ‘Operation Twist’ on 23 December 2019

Origin of Operation Twist

Operation Twist was term given to its monetary policy by US Fed. Its objective was to lower long term interest rates. US conducted Operation Twist 2 times: in 1961 and in 2011.

Objective of Operation Twist

• The financial tool also helps in either reducing liquidity in the market or increasing it, based on the simultaneous sale and purchase of bonds.
• Help in industrial growth by low long term interest rates
• Provide a boost to the economy by making credit cheaper for businesses, industries and other borrowers.
• The simultaneous purchase and sale of bonds or securities through OMOs help in changing the shape of the yield curve.
• Low yield on long term bond will helps in bringing down overall borrowing costs for the government.
• The long-term investment will create jobs in the country which would lead to an increase in the demand for other products.

Need of Operation Twist in India

• To combat a period of recession and prolonged slow growth. India is in slowdown since 2019.
• It was necessitated as consecutive 5 times rate cuts didn’t yield desired results. RBI has cut rates by 135 basis points throughout the year. The one-year median marginal cost of funds based lending rate (MCLR) has declined only 49 basis points (bps)
• Due to NPA baggage and losses during earlier years, Indian banks failed in transmitting the cumulative rate cut.
• Rise in inflation and slow growth make it necessary for RBI to do out of box thinking.
• Present market conditions in India have made investors/customers hesitant in making long-term investments or availing long-term loans

Operation Twist by RBI

• Simultaneous purchase and sale of government bonds/securities through special open market operations (OMOs)
• Two rounds of the monetary policy move have been conducted by RBI in Dec-Jan after a review of the liquidity situation.
• RBI bought 10-year bonds or securities worth Rs 10,000 crore and sold short-term securities worth Rs 8,501 crore.
• RBI purchased govt securities (10-year bonds) worth Rs 10,000 crore and sold off short-term securities to the tune of Rs 6,825 crore respectively.
• The maturity period of the short term securities was up to 2020 but the maturity period of long term securities is for 10 years or up to 2029.

Benefits of Operation Twist to economy

• The interest rate for the long term investment will come down so the investor will take more loans for long term investments.
• The flow of money will increase in the country, and aggregate demand in all sectors of the economy will boost.
• The overall increase in productive activities will further create jobs in the economy.

How will Operation Twist effects retail customers?

• Softening yields of long-term bonds will prove beneficial to investors with debt heavy portfolio. Purchasing long-term government securities also increase their prices and subsequently increase the returns on debt-heavy portfolios with long-term securities.
• Consumers and retail loan borrowers will also benefit from the move as lower yields on long-term government securities results in a fall in interest rates for long-term loans.
• High market yields on long-term government securities result in higher interest rates on long-term loans. This can affect customers seeking long term loans for vehicles, real estate, and other long-term borrowings.

Open market operation

What is Open market operation?

When the Central Bank like RBI buys or sells securities to/ from the market, it’s engaging in what’s known as Open Market Operations (OMOs). The securities are Treasury notes or mortgage-backed securities. OMOs serves as one of the major tools of RBI uses to raise or lower interest rates. The RBI manages and controls the liquidity, rupee strength and monetary management through purchase and sale of government securities (G-Secs).

Contractionary monetary policy : Selling securities. Results in high interest rate and low inflation

Expansionary monetary policy: Buying securities . Results in lower interest rates, and increase in economic activity and lower unemployment.

End note

In this article, we have given overview of Operation Twist by RBI, and how it will help in increasing economics activities in country. Please share your feedback and comments in discussion thread below or mail us info@xamnation.com

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