The goals of Operation Twist
Operation Twist by the RBI is not as strong or as ambitious as that of the US Federal Reserve in 2012. Consider that the transmission mechanism for monetary policy is not as well-tuned as it is in the US. More than anything else, the fact that it can affect long-term yield on its own will give the RBI more confidence as it tests this equipment.
- To lower the long-term government securities yield. The real advantage of such a move is that, in the future, if additional securities are issued as part of borrowings, only reduced interest rates will need to be paid by the government. Given that the yield is currently lower, issuing long-term securities in the future may be more comforting for the government.
- To lower long-term interest rates in order to increase credit, consumption, investment, etc.
- The RBI is fed up with utilizing the repo rate ineffectively. The central bank is upset that banks are not altering their lending rates in response to the repo signal. The RBI was looking for new means of communicating monetary policy in this situation. The “Operation Twist” is a trial run for a new method the RBI can use to affect market interest rates by buying and selling government bonds.
Operation Twist
Through a process known as “Operation Twist,” the Reserve Bank of India conducts concurrent purchases and sales of long- and short-term government securities on the open market (OMO). The Reserve Bank of India has implemented Operation Twist to reverse the economic slump and lower interest rates to encourage investment. The US Federal Reserves first implemented Operation Twist in 1961 in an effort to boost the US economy. And the US’s use of the mechanism to raise short-term rates to stimulate the economy was successful. Despite not having much of an impact on long-term rates, it was successful in bringing the US economy out of the doldrums. In 2011, the US Federal Reserve conducted “Operation Twist” to spur economic development in the wake of the global financial crisis.
Although it isn’t quite as aggressive as another sort of monetary policy termed quantitative easing, it entails buying and selling government bonds in an effort to generate monetary relief for the economy. The Federal Reserve employs a program of quantitative easing called Operation Twist. The goal of Operation Twist is to drive down longer-term interest rates. By bringing down long-term Treasury yields, it achieves this. The demand for Treasury notes is raised by purchasing long-term notes with the money from short-term bills. Like any other asset, the price rises as demand increases. However, lower yields for investors countered increased bond prices.
On December 19, the Reserve Bank of India made the decision to carry out its own version of “Operation Twist”. Operation Twist aims to reduce long-term Treasury yields in order to put downward pressure on longer-term interest rates. With the money received from short-term bills, the central bank purchases long-term notes. Treasury notes are now more in demand as a result. Similar to other assets, the price increases as demand increases. However, lower yields for investors countered increased bond prices.
Operation Twist was conducted three times by the RBI.
1) December 19, 2019.
2) December 23, 2019.
3) January 6, 2020.