(Daily News Scan - DNS English) What is Operation Twist
Why in News?
The Reserve Bank of India has recently decided to conduct the Indian version of ‘Operation Twist’ through simultaneous purchase and sale of government securities under Open Market Operations (OMOs).
A brief history of Operation Twist:
- Operation Twist is the name given to a US Federal Reserve monetary policy operation.
- Operation Twist was first proposed in 1961 by the John F Kennedy administration in order to revive the weak economy post the Korean War (in 1961).
- In US the operation involved the purchase and sale of government securities to boost the economy by bringing down long-term interest rates.
- The initiative was known as ‘Operation Twist’ in homage to the Chubby Checker song and dance that became very popular during that time.
- ‘Operation Twist’ was again implemented in late 2011 and 2012 to stimulate the economy hit by the global financial crisis.
Indian version of ‘Operation Twist’:
- The first phase of Operation Twist, in India was carried out by RBI on December 23rd, 2019.
- This operation involves buying and selling of government securities simultaneously in order to bring down long-term interest rates and bolster short-term rates.
- The current operation under RBI entails selling of short-term securities worth Rs. 10,000 crore and buying long-term securities worth the same value.
- As the central bank buys long-term securities (bonds), their demand rise which in turn pushes up their prices.
- There is an inverse relationship between the bond prices and their yields.
- 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.
Benefits of Operation Twist:
- Fixed income investors will benefit from easing yield of long-term bonds.
- Consumers/borrowers will also make profit from 'Operation Twist' as the retail loans will now be cheaper.
- The flow of money will increase in the country, and aggregate demand in all sectors of the economy will be boosted.
- The increase in productive activities will result in job creation in the economy.
Various factors are plaguing the Indian Economy, at present like slump in demand in various sectors, low consumption rate, rising inflation, fiscal pressure etc. Operation Twist by RBI is believed to be a positive initiative in order to control long-term bond yields and bring down interest rates on long-term borrowing. This would help the Indian economy to boost consumption and revive growth.
