Home >Opinion >Quick Edit >Opinion | A twist of rates

The Reserve Bank of India (RBI) on Thursday said it would conduct special open market operations on 2 July to buy long-dated government bonds worth 10,000 crore and sell shorter-tenure ones of the same value. This simultaneous purchase and sale purchase of government securities by the central bank, dubbed Operation Twist, is aimed at pushing long-term interest rates lower. RBI said it would buy bonds maturing between 2027 and 2033, and sell those maturing between 2020 and 2021.

Yields on short-dated government bonds have slumped in recent weeks, amid a flush of liquidity, while those on long-tenure paper remain stubbornly high. Buoyant long-term interest rates tend to make government borrowing costly. By twisting the yield curve and flattening it a bit, RBI hopes to catalyse credit and spur economic growth. Commercial banks have been loath to fund projects, as an old pile-up of bad loans and an economic contraction combine to threaten their own financial stability. Unless we see a revival in demand, efforts to compress the cost of capital may not aid our economy much. Yet RBI must try. It must use every tactic it’s got.

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