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.
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.
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