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.
Impact of “Operation Twist” on the yield curve and interest rates on the economy:
Price and yield move in the opposite direction because their correlations are negative. Long-term bonds’ prices increase and their yields decrease when the Reserve Bank of India purchases them. When the Reserve Bank of India sells short-term bonds, bond prices fall and yields rise at the same time. Demand for government securities rises as the Reserve Bank of India purchases long-term assets with the money received from the sale of short-term securities. Lower yield on long-term securities is mitigated by higher bond prices for investors.
The yield curve would change shape, lowering the cost of borrowing for borrowers. Bond prices and interest rates also move in the opposite direction, making loans more affordable when bond prices rise.
This would lead to lower interest rates for bank deposits and other fixed-income-bearing savings choices, as well as for loans for homes, cars, and other types of credit. The Reserve Bank of India carried out the first stage of “operation twist” to regulate the long-term yield on December 23, 2019. In order to purchase 10-year long-term notes worth Rs 10,000 crores that maturity in 2029, the RBI sold Rs 6,825 cores worth of one-year short-term bonds. The Reserve Bank of India issued one-year short-term bonds worth Rs 8,501 crores as part of “operation twist” phase two in order to purchase 10-year long-term bonds worth Rs 10,000 crores. The Reserve Bank of India purchased long-term government securities with maturities in 2024 and 2026 in the third phase of operation Twist. Similar to this, the RBI has run operation twists over the past two years to boost the flagging economy.
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.
Understanding Operation Twist’s Key Points:
- The Reserve Bank of India’s monetary policy is known as Operation Twist.
- The RBI has adopted an unconventional monetary policy in this case.
- The Open Market Operation (OMO) of the RBI includes Operation Twist.
- The RBI simultaneously buys and sells government securities as part of Operation Twist.
- While selling short-term government assets, the RBI purchases long-term ones.
- Operation Twist aims to lower the interest rate on long-term treasury bonds.
- Both the public and the government can borrow money at lower costs when the interest rate declines. This is meant to bolster the economy.
Conclusion:
Currently, people are not borrowing money from banks as a result of high-interest rates and the ongoing decline in India’s GDP. In such a setting, the Reserve Bank of India has made the decision to use “Operation Twist” to encourage long-term investment in the nation. The long-term yield has decreased significantly as a result of the RBI’s Open Market Operations, indicating that Operation Twist reasonably achieved its goals. The 10-year yield was 6.75 percent at the time of Operation Twist’s first round and has now decreased to 6.51 percent after two rounds. Thus, Operation Twist could assist banks by releasing long-term capital so that they can increase long-term investments and lending prospects. In the effort to revive the Indian economy, it has been a hopeful and effective solution.