Home / News / India /  Operation Twist: RBI’s go-to move in times of crisis

The Reserve Bank of India conducted another Operation Twist (OT) last week to manage government security yields. The idea was to bring down long-term yield. The first round of OT was held on 23 October 2019. Since then, RBI  has often resorted to such policies. Mint explains.

What is central bank’s Operation Twist?

Central banks across the globe have often simultaneously bought long-dated securities even as they sell short-term securities. This is called Operation Twist, named after the American dance move that was the rage when the move began in the US in 1961. The US Federal Reserve, along with other central banks have over the years used such measures with the intention of lowering long-term rates, reducing the cost of capital, increasing lending activity and consequently, accelerating growth rates. Especially in times of crisis, the steps come to the aid of banks. RBI has taken these measures numerous times since last year.

Why is RBI undertaking them so frequently?

The Reserve Bank has conducted several such operations since March. Their increased frequency is an outcome of the coronavirus pandemic and its impact on liquidity and market conditions. The objective is to keep the yields low and provide as much support to the economy as possible till growth resumes. In the Operation Twist conducted on 1 October, the central bank bought three sets of securities that mature between 2025 and 2029. With the recent bond sales devolving, the move will perhaps help RBI in reducing the yields and assisting the government in its borrowing programmes.

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Are such instruments an alternative to rate cuts?

With inflation still above the 6% comfort zone, the Monetary Policy Committee may be unwilling to slash rates over the next few months, even as economy continues to operate below potential. That leaves RBI with instruments such as open market operations, including OT to provide an accommodative stance. This may also help aid moderation in interest rate spreads.

Why is management of yield curve important?

A yield curve is a line that has the yield of bonds of the same credit quality but with differing maturity. This gives us an idea of future rate changes and of difference between short and long-term rates. The curve is used as a benchmark for other debt, especially by firms that resort to lending through the bond market. Managing yields is also important from the point of view of the cost of borrowings for the government. Most central banks have adopted some form of yield curve management, more so during economic recession.

Will we see a reduced cost of borrowing?

The proactive intervention by RBI using open market operations and other interventions have resulted in interest rates being moderated over the last few months. It is noteworthy that despite the Centre increasing its borrowings, RBI has managed to keep G-Sec yields in check using instruments. This in turn shows the efficacy of some of the instruments. Hence, a further fall in cost of borrowings would depend more on the extent of government borrowings in the second half of the financial year.

Karan Bhasin is a policy researcher.

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