RBI to Hold Round-2 of Operation Twist on Monday

The Reserve Bank of India (RBI) has announced on Thursday that it will conduct the round two of the operation twist on the coming Monday. The RBI will simultaneously purchase and sell government-issued securities in an open market operation (OMOs) for Rs 10,000 crore. This is done after reviewing the liquidity level in the country. 

The Central Bank of India had done similar open market operations earlier this week by purchasing securities of worth Rs 10,000 crore while it gave away securities worth Rs 6,825 crore. The RBI in a statement said that it has decided to conduct another OMO after reviewing liquidity and assessing other financial conditions. 

The Central Bank will do a simultaneous purchasing and selling activities of bonds. This move is considered as an effort to lower the yields in the long term. This is the first instance of RBI carrying out an exclusive OMO of this sort, a similar operation in the United States around ten years back.  

What exactly is Operation Twist?

‘Operation Twist’ is a powerful monetary tool. The US Federal Reserve first used it under the leadership of Jerome Powell. Operation Twist is capable of influencing the interest rate and has done it so many times in the past and had an impact on the US economy.

Also Read: RBI Flags Reliance on Retail Loans; Suggests Focus on Industrial Lending

The process of Operation Twist involves selling and buying of long-term and short-term government bonds simultaneously. Later, many Central Banks around the world started to make use of this. RBI too has not fallen behind when it comes to making use of the provisions of Operation Twist. 

Why has RBI chosen to do an Operation Twist?

RBI has chosen to go for this operation as it feels that this along with its rate cuts rolled out since the start of the year will act in unison to lower the interest rate in the economy. Despite RBI cutting interest rate by 130 points since the start of 2019, has not had much of an impact on banks charging higher interest from borrowers. 

RBI may opt to do this activity again if the overall interest rate in the Indian economy doesn’t fall to the expected levels.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in

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