RBI to conduct Operation Twist on Thursday to manage yield curve
The Reserve Bank of India will on Thursday conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for ₹10,000 crore each.
The decision was taken after a review of current liquidity and financial conditions, the central bank said in a statement. The bank has been doing periodic review of the financial condition of the country since the outbreak of the coronavirus disease (Covid-19).
Simultaneous purchase and sale of government securities under OMOs is popularly known as Operation Twist. It involves buying long-end debt while selling short-tenor bonds to keep borrowing costs down.
The RBI will purchase three government securities of different maturity dates aggregating to ₹10,000 crore and sell two securities aggregating to the same amount using the multiple price auction method.
According to the central bank, it reserves the right to decide on the quantum of purchase/ sale of the securities. The result of the auctions will be announced on the same day.
This will be the second such exercise this year. The RBI had conducted this year's first round of Operation Twist on January 7.
Operation Twist is a way employed by the central bank to manage yields in the market. It is a program of quantitative easing used by the RBI that was first introduced by the Federal Reserves in US in 1961.
How does it help?
Since prices and yields move in opposite directions, by purchasing longer-term bonds, the RBI can help drive the bond prices up and yields down. At the same time, selling shorter-term bonds should cause their yields to go up (since their prices would fall). In combination, these two actions twist the shape of the yield curve.
In an attempt to keep borrowing costs lower for the government, RBI is putting pressure on the market by refusing to absorb funds at a higher yield.
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