Operation Twist of RBI
Posted on : 13 Jan 2020Views: 108
- 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
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