oppn parties RBI's Version Of Operation Twist Achieves The Desired Result, For Now
OPINIONS : Strongly Expressed

January 29, 2023

People Are Talking About

Welcoming 2023

News Snippets

  • RBI governor Shaktikanta Das says that inflation is easing and the current account deficit is manageable
  • Adani Enterprises FPO sees just 1% subscription on the first day as the stock goes down to Rs 2762, much below the price band of Rs 3112-3276
  • Stocks bleed on Friday post the Hindenburg report as Adani stocks are hammered: Sensex loses 874 points to 59330 and Nifty 287 points to 17604
  • Rs 263cr TDS scam detected by the I-T department. A mid-level officer was the kingpin and had amassed huge wealth
  • Women's U-19 World Cup -India reaches the final by beating New Zealand by 8 wickets
  • New Zealand beat India by 21 runs in the first T20 as spinners choke Indian batters
  • Sania Mirza and Rohan Bopanna lose in the Australian Open finals
  • Sania Mirza and Rohan Bopanna lose in the final of the Australian Open
  • India to play New Zealand in the first T20 of the three-match series in Ranchi today
  • RBI has proposed special purpose vehicles (SPEs) mechanism to sell bad loans to interested investors via securitization
  • JD(U) decides not to attend the Bharat Jodo Yatra finale in Srinagar
  • Hindenburg defends its report on the Adani group, dares Gautam Adani to sue it in the US
  • BJP's talks with Tipra Motha in Tripura make no headway but the party is confident of winning in the ensuing elections
  • Pathan is a super hit at the box office: Rs 57cr in India (worldwide Rs 106cr) on Day 1 and then Rs 70cr on Day 2 which was Republic Day holiday
  • Centre tells Delhi HC that Covid vaccines can't be mixed when taking the second dose
A Mirage2000 and A Sukhoi 30 of the Indian Air Force on a training mission crashed separately, in Bharatpur in Rajasthan and Morena in Madhya Pradesh, killing one pilot
oppn parties
RBI's Version Of Operation Twist Achieves The Desired Result, For Now

By Sunil Garodia
First publised on 2019-12-25 18:43:08

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

The RBI, for the first time, announced that it would simultaneously buy and sell government bonds in an open market operation (OMO) designed on the lines of Operation Twist in the US several decades ago. This operation is mainly conducted to calm down the long-term bond market in times of downturns in the economy. It is a market operation designed to bring long-term bond yields closer to the repo rate.

The RBI was worried because despite reducing the repo rate by a cumulative 135 basis points since January 2019, it has not been able to make the financially stressed banks in India to pass on more than 50 basis points to the end-user. It tried mandatorily linking the lending rate to an external benchmark, including the repo rate, but to no avail. As a result, and with fiscal slippage on part of the government and rising inflation, the 10-year G-Sec market saw a spurt in yield which went up to 6.8% just before the RBI announced the OMO.

Basically, the RBI decided to buy Rs 10000cr worth of G-Sec maturing in 2029 and simultaneously sold those maturing in 2020 for the same amount. The immediate result of this was that yields came down on the long-term bonds by around 20 basis points on the day the announcement was made. Also, the yield on shorter-term bonds (up to five years) rose by 16 basis points. That resulted in flattening the yield curve. It also helps in reducing the borrowing cost for the government. It is also beneficial for the retail customer as high yields on long-term bonds make banks jack up interest rates on lending. If rates for long-term bonds come down, banks will reduce their lending rates. That is also one of the unsaid objectives of the OMO -  to make banks lower lending rates.

But experts are not convinced about the long term efficacy of the operation. Yet, almost all agree that it will have a salutary effect in the short term and take the heat out of the long-term bond yields. But Operation Twist was never designed as a permanent policy tool. It has to be used sparingly whenever it is seen that excess liquidity creates a rally in the short-term bonds market and pushes up the yield of the long-term bonds. For now, the RBI operation seems to have had the desired effect. But if inflation keeps on rising and fiscal targets are not kept under manageable limits, long-term bonds market will heat up again. Then, no amount of OMOs will be able to bring them down.