Objectives of Operation Twist by the RBI

Objectives of Operation Twist by the RBI

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Operation Twist, a monetary policy strategy, has recently been put through some testing by the RBI. Operation Twist has been carried out three times: on December 19, 2019, December 23, 2019, and January 6, 2020. Here, we look at what operation twist means, how it works, and how it affects the economy. Activity wind is a money related strategy mediation by the national bank, led through Open Market Tasks (OMOs), where the national bank is purchasing long haul obligations of the public authority and simultaneously undercutting term protections of the public authority. The yield of long-term securities will be lower than that of short-term securities if you buy long-term securities and sell short-term securities. Operation Twist aims to achieve this yield impact.

As a result of lower longer-term yields and, as a result, a lower long-term interest rate, loans for the purchase of homes, automobiles, and investment projects will be less expensive, which will help the economy. Operation twist is carried out by selling and buying government securities in the open market. In comparison to the US Federal Reserve's 2012 operation twist, the RBI's is neither as potent nor as ambitious. Remember that the transmission mechanism for monetary policy is not as finely tuned as it is in the United States. The RBI's confidence will be bolstered by the happy feeling that it can influence long-term yield while it is testing this equipment, more than anything else.

• The first goal is to lower the yield on long-term government bonds. The real benefit of this action is that the government will only have to pay lower interest rates if it issues additional securities as part of its borrowings in the future. Given the lower yield at the moment; The government might feel more secure in the future if it issued long-term securities.

• The subsequent goal is to cut down long haul financing cost so higher credit, utilization, speculation and so on.

• Thirdly, the RBI has grown weary of utilizing the repo rate with little effect. The central bank is concerned that banks are not adjusting lending rates in response to the repo signal. The RBI was looking for new ways to transmit monetary policy in this setting. The operation twist is a test of a new option that lets the RBI buy and sell government bonds to change the market interest rate.