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

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  • Calcutta HC says Cricket Association of Bengal is not liable to pay tax on advertisement inisde Eden Gardens cricket ground as it is not a 'public place' because it does not have unrestricted access for the general public
  • Supreme Court admits a plea from a child of a single OBC mother who had applied for an OBC certificate for her son
  • Supreme Court approves applying strict preventive detention laws for 'cybercriminals'
  • SBI likely to shift part of operations of its Global Market Unit from Kolkata to Mumbai
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  • Marine insurance costs surge as the oil corridor in Strait of Homruz becomes risky due to war
  • Stocks weaken on Monday on global cues: sensex sheds 511 points to 81896 and Nifty 140 points to 24971
  • Former left-arm spinner Dilip Doshi dies in London at 77. He played for India in 33 Test matches and for Bengal in domestic tournaments
  • Pant becomes the only keeper to score two centuries in the same Test in England
  • England Test: Rishabh Pant hits his second ton and KL Rahul a classy century to put India on top, England need 350 runs on the last day, with the ptich showing signs of wear and tear
  • DGCA orders an audit of the entire aviation ecosystem in the wake of recent snags in many flights after the AI Dreamliner crash in Ahmedabad
  • 2 Pahalgam residents arrested by NIA for sheltering and aiding 3 terrorists who killed civilian tourists in pahalgam tell the agency that there were 3 LeT ultras from Pakistan that carried out the attack
  • India unlikely to agree to US demands for lower tariffs on agri products and GM food, trade deal faces fresh hurdles
  • Stocks likely to plummet today as traders will be worried about the effect of US strike on iran, oil price rise and possible inflation. Foreign funds may also withdraw in the volatile global situation
  • Oil prices likely to shoot up as US strikes at iran and the latter decides to close the Strait of Homruz
Brilliant batting by England wins the match for them as sloppy India fail to defend 371 runs ////// England take a 1-0 lead in the 5 match series
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.