RBI plans its own ‘Operation Twist’; to buy, sell bonds simultaneously

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News:The Reserve Bank of India has announced that it will carry out US-style ‘Operation Twist’ to bring down interest rates.

Facts:

About Operation Twist:

  • Operation Twist is when the central bank uses the proceeds from the sale of short-term securities to buy long-term government debt papers, leading to easing of interest rates on the long term papers.
  • Operation Twist first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.

What is the RBI’s Operation Twist?

  • Under Operation Twist,RBI will conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for ₹10,000 crore each.
  • It will purchase the longer-term maturities which are government bonds maturing in 2029 and simultaneously sell the shorter duration ones which are short-term bonds maturing in 2020.
  • This simultaneous purchase and sale will bring down interest on long term loans which can lead to increase in economic spending.
  • It may also become a driving factor for long-term economic activity and the addition of new investment stock.

About Open Market operations:

  • Open market operations 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. The central bank carries out the OMO through commercial banks and does not directly deal with the public.
  • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to out liquidity from the system.