RBI’s Operation Twist

Operation Twist is the name give to the monetary policy operation of the US Federal Reserve. It involves the sale and purchase of government securities to boost the economy by bringing down the long term interest rates. It will help to make loans less expensive with those looking to buy homes, cars and make savings less desirable as it doesn’t pay much interest.

Operation Twist by RBI

The RBI in a review of the current liquidity and market situation is keen to bring down the long term rates to kickstart investment and revive the economy, as business investment and housing demand is linked to long term interest rates.

The RBI has decided to purchase Rs 10000 crore worst of one security- the 6.45 percent GS 2029. It is a long term 10 year bond. On the sell side, it has proposed to sell four securities of a total of Rs 10000 crore – 6.65% GS 2020, 7.80% GS2020, 8.27% GS2020 and 8.12% GS2020. All these are short term securities maturing in 2020. When the RBI purchases, demand is expected to rise, leading to lower yields. On the other hand, sale of short-term securities will push up the short term rate.

US experience

It was in 1961 when the John F Kennedy administration proposed operation twist which was employed by the US Fed. It was also implemented in 2011 and 2012 to estimate the economy hit by the global financial crisis. The first programme ran from September 2011 to June 2012 & involved $400 billion in Fed assets. The second ran from July to December 2012 with a total of $267 billion. In December 2012, Fed ended the program to replace it with the policy of quantitative easing to lower long term rates by making open market purchases of long dated Treasuries and mortgage backed securities.