What is Operation Twist?

Question

Asked: October 13, 20212021-10-13T00:33:09+05:30 2021-10-13T00:33:09+05:30In: Economics

Sagar · Answer 1 · 2021-10-14T03:07:46+05:30

Context:

Reserve Bank of India (RBI) has conducted its bond swapping programmed called India’s Operation Twist.

Operation Twist was first introduced to the world by the US in a bid to lower long-term interest rates and to provide a boost to the economy by making credit cheaper for businesses, industries, and other borrowers.
- the original “Operation Twist” was conducted in 1961
- the second one was in 2011.
In India’s context, Operation Twist is a bid to bring down interest rates on long-term loans– something that it has failed despite five rate cuts by RBI this year. The financial tool also helps in either reducing liquidity in the market or increasing it, based on the simultaneous sale and purchase of bonds.
The simultaneous purchase and sale of bonds or securities through open market operations (OMOs) help in changing the shape of the yield curve.

The period of the economic slowdown can be only countered with heavy investment in the economy which leads to an increase in Gross Fixed Capital Formation.
Since these can be projects with long-term gestation like roads, dams, bridges, etc. Such projects need long-term financing and due to the compounding of interest, they always aim for cheap interest rates.
Hence lowering the long-term interest rate will boost investment and revive the economy.

Open market operation is the sale and purchase of government securities and treasury bills by RBI
The objective of OMO is to regulate the money supply in the economy.
When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and sells government securities to suck out liquidity from the system.
OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimize its impact on the interest rate and inflation rate levels. Operation Twist had helped in better transmission of the central bank’s 135 basis points of rate cuts last year.