RBI To Conduct Operation Twist To Ease Interest Rates

On the lines of the US Federal Reserve's "Operation Twist" that was last resorted to in the year 2013, the Reserve Bank of India for the first time has announced simultaneous purchase and sale of government bonds under the OMOs.

RBI To Conduct Operation Twist To Ease Interest Rates

"On a review of the current liquidity and market situation and an assessment of the evolving financial conditions, the Reserve Bank has decided to conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for Rs 10,000 crores each on December 23, 2019," said the central bank on December 19.

"Operation Twist" mechanism involves buying of long-term government debt securities from the proceeds garnered from selling short term instruments by the central bank. The process results in lowering of interest rates on the long term papers.

RBI under the open market operation will be selling four instruments with maturity in 2020 and at the same time buy 6.45% government bond with maturity in 2029. The OMO facility enables the apex bank to oversee liquidity conditions by selling or purchasing government bonds through open auctions.

Furthermore, the central bank said it has the authority to decide on the quantum of OMOs and might accept or reject any or all of the bids partially or wholly without giving any due reasons.

Despite excess liquidity and five consecutive rate cut by 135 basis points, yield on benchmark 10-year government bond has risen by almost 40 bps since December 5, when the RBI resorted to a rate pause amid rising inflation. This is because concerns around higher market borrowing by the government on risks of likely fiscal slippage weighed on bond yields.

GoodReturns.in