Operation Twist – Explained

What is Operation Twist?

Operation twist is a Central Bank’s monetary policy operation in which the Central Bank buys and sells Government Securities (Long Term and Short Term)  through open market operations (OMOs) according to their interest. It was firstly conducted by the US in 1961 and again in 2011 and the main aim of both was to reduce long term yield.

Operation Twist in India

Operation Twist

Recently Reserve Bank Of India conducted operation twist through Open Market Operation (OMO) in which RBI is buying long term Government bonds and at the same time selling short term Government Securities to reduce the yield on long-term bonds and as the result of this announcement, the yield on the 10-year bonds dropped by 20 basis points (bps).

Recently Reserve Bank Of India conducted operation twist through Open Market Operation (OMO) in which RBI is buying long term Government bonds and at the same time selling short term Government Securities to reduce the yield on long-term bonds and as the result of this announcement, the yield on the 10-year bonds dropped by 20 basis points (bps).

Why Operation Twist implemented in India?

The main objective of Operation twist in India is to lower longer-term yield which will reduce long-term interest rates and this will support the economy by making long term loans less expensive. This will encourage people to take home loans, car loans and also encourage to finance investment projects. 

How Operation twist work?

As the RBI is buying long-term bonds, so the demand for long-term will increase and this will drive up the prices of long-term bonds. The rise in price will bring down the yield of long-term bonds it means that the bondholder will get a lower return on his investment. The yield of long-term bond determines the interest rates in the economy. Lower long-term interest rate means that the lower interest rates for long-term loans like those for buying cars or houses or financing projects.

This will also decrease the return on long-term saving, so we expect that the economic sentiment will change from saving to spending. Cheaper retail loans also help in boosting consumer spending which accounts for a big chunk of the GDP.

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