Operation Twist of RBI
Posted on : 13 Jan 2020Views: 564
- The Reserve Bank of India (RBI) announced simultaneous sale and purchase of government bonds. RBI will sell short-term bonds of ₹10,000 crore, it will also purchase long-term securities of the same value. With RBI’s Operation Twist the net liquidity in the system will remain unchanged.
- Operation Twist of United States: RBI’s move resembles the 2011 Operation Twist of the US Federal Reserve Bank. The Fed had swapped short-term bonds for longer-term debt. US first attempted this exercise in 1962. At that time, the “twist" was a new dance craze sparked by singer Chubby Checker. Since then this exercise has carried this name.
- The idea is to twist the yield curve: The yield curve is a graph that plots the yields of government securities (or other financial securities) of different maturities.
- The yield is the per-year return an investor can earn on a financial security by staying invested in it till maturity.
- When a central bank buys government securities, the prices go up. At a higher price, the yields or the returns come down as the interest paid on the securities stays the same.
- Vice versa, when the bank sells government securities, the prices fall and the return or the yield on the security goes up.
- This creates a visual effect of a twist in the yield curve and the yield curve will flatten.
- Benefits of RBI’s Operation Twist:
- Yield anomaly corrected
- Long-term borrowing will become cheaper
- Spur bank lending private borrowing
Article Related Questions
Operation Twist was in news recently. What is Operation Twist?
1.UN backed coalition combat in Yemen
2.Monetary measure by the central bank
3.United States led coalition combat in Syria
4.New approach to address climatic concerns
Right Ans : Monetary measure by the central bank