RBI to buy and sell Government Securities worth Rs 10,000 crores

On December 23, 2019, the Reserve Bank of India will buy and sell government securities of Rs 10,000 crores under a special Open Market Operation. Such moves are implemented by the federal bank in order to bring down the interest rates of long-term securities. This time RBI has named its move as “Operation Twist”.

There are different types of Government Securities issued by the Federal Bank.

Operation Twist

The buying of long-term bonds and selling of short-term bonds by RBI is called operation twist. When the long-term bonds are bought by RBI, their demand increases. This lowers long term yields. This way the yield curve gets twisted and hence the name “Operation Twist”. This has significant effect on the long term interest rated that govern the investment and growth in the economy.

Operation Twist is generally used by Central Banks when long term interest rates remain high in spite of lowering interest rates.

United States implemented the operation twice, in 1961 and 2011.

What is Open Market Operation?

It is a tool used by the RBI to smoothen liquidity conditions in the country. The main objective of OPO is to regulate money flow in the country. RBI operates the OMO through commercial banks and does not deal with the public directly.

Key Features of Government Securities

The Government Securities can be issued only by Governments at the Centre and State and also by Semi-Governmental authorities. The semi-Governmental Authorities are those authorized by the GoI.

When the RBI wants to increase money supply in the economy, it purchases government securities. It sells government securities when the need to suck out liquidity occurs.

Legislation of Government Securities

A Legal framework for issuance of government securities was provided by the Public Debt Act, 1944. It was replaced by the Government Securities Act, 2006. It oversees government securities and defines purpose of securities which is predominantly raising loans.

Month: Current Affairs - December, 2019