OPERATION TWIST: The Simultaneous purchase and sale of government securities under OMOs
What actually operation twist is?
- Operation Twist – Federal Reserve (Fed) monetary policy initiative utilized in the past to lower long-term interest rates to further stimulate the U.S. economy when traditional monetary tools were lacking via the timed purchase and sale folks treasuries of various maturities.
- The tool essentially aims at changing the form of the yield curve (hence the name — twist) through simultaneous buying and selling of long- and short-term government bonds.
- In India, the RBI put its version of Operation Twist by buying ₹10,000 crore worth of 10-year government bonds while selling four shorter-term government bonds adding up to an equivalent value.
- In the US such tactics were first utilized in 1961, when the economy was recovering from recession.
RBI has conducted simultaneous purchase and sale of state securities under Open Market Operations (OMO) for ₹10,000 crore each.
What is open market operations?
- Open Market Operations (OMO) is one among the quantitative monetary policy tools which is used by the financial institutions of a rustic to regulate the cash supply within the economy.
- OMOs are conducted by the RBI by way of sale or purchase of state securities (g-secs) to regulate funds supply conditions.
Benefits of the OPERATION TWIST:
- brought down the interest on long term loans which can lead to increase in economic spending.
- The action of Operation Twist by the RBI is encouragious for the market. This step has becqme a driving factor for long-term economic activity and therefore the addition of latest investment stock.