Operation Twist

Context:

With the objective to help monetary transmission, the Reserve Bank of India (RBI) has decided to bring back its bond swapping programmed billed as India’s Operation Twist.

About Operation Twist:

• Operation Twist was a term given to a monetary policy tool used by the United States on two occasions to influence market interest rates
  • The original “Operation Twist” was conducted in 1961
  • The second one was in 2011.
• In both scenarios, the objective was to lower long-term interest rates.
• The financial tool also helps in either reducing liquidity in the market or increasing it, based on the simultaneous sale and purchase of bonds.
• 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.
• In both scenarios where the US initiated Operation Twist, it was to combat a period of recession and prolonged slow growth.
• Like the United States, India has been encountering a period of a prolonged period of slow growth since the first half of 2019.
• The simultaneous purchase and sale of bonds or securities through open market operations (OMOs) help in changing the shape of the yield curve.
• 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.

Open market operation:

• Open market operation is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
• 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.
• RBI carries out the OMO through commercial banks and does not di directly deal with the public.
• OMO is one of the tools that RBI uses to smoothen the liquidity conditions throughout the year and minimize its impact on the interest rate and inflation rate levels.