1.RBI brings back bond swapping program ‘Operation Twist

  • What is ‘Operation Twist’?

  • How does RBI manage ‘Operation Twist’?

  • How does it affect investors?

 GS paper 3 ( Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment)

What is the context about?

  • The Reserve bank of India has decided to bring back its bond swapping programmed billed as India’s Operation Twist with an aim to help monetary transmission.
  • The RBI said that it will conduct purchase and sale of government securities under open market operations (OMO) for Rs10,000 crore each on 27 April.

What is ‘Operation Twist’?

  • ‘Operation Twist’ is RBI’s simultaneous selling of short-term securities and buying of long term securities through open market operations (OMO). Under this mechanism, the short-term securities are transitioned into long-term securities.
  • The tool essentially aims at changing the shape of the yield curve (hence the name — twist) through simultaneous buying and selling of long- and short-term government bonds.

How does RBI manage ‘Operation Twist’?

  • There is an inverse relationship between the bond prices and their yields. As the central bank buys long-term securities (bonds), their demand rise which in turn pushes up their prices.
  • However, the bond yield comes down with an increase in prices. Yield is the return an investor gets on his (bond) holding/investment.
  • The interest rate in an economy is determined by yield. Thus, lower long-term interest rates mean people can avail long-term loans (such as buying houses, cars or financing projects) at lower rates.
  • This also results in a dip in the expected returns from long-term savings which tilts the balance from saving towards spending. Hence, cheaper retail loans can help encourage consumption spending which is the largest GDP component in the economy.

How does it affect investors?

  • Fixed income investors with higher exposure to long term debt will benefit from easing yield of long-term bonds.
  • Consumers/borrowers will also profit from ‘Operation Twist’ as the retail loans will now get cheaper.
  • Previously banks were forced to price their retail loans at higher rates owing to high yields on long-term government borrowings. Cheaper retail loans mean a boost in consumption and spending in the economy which in turn will revive growth.

What are Open Market Operations?

  • The RBI manages and controls the liquidity, rupee strength and monetary management through purchase and sale of government securities (G-Secs) in a monetary tool called Open market Operations.
  • OMOs are the market operations conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.