A few months earlier, the Central Bank of India came up with a fascinating code name that hadn’t taken much time to reach its trending peak since its very inception: Operation Twist. Rolled out by the RBI, the mission was all set to benefit the citizens of the country with a significant amount of benefits.
But the question arises as to what is the twist all about?
Operation Twist was the name coined for a monetary policy tool by the US Federal Reserve with a far-fetched motive to influence the prevailing interest rate in the markets. The tool essentially aims at changing the shape of the yield curve through the simultaneous buying and selling of short-term and long-term government securities. The Central Bank put in inspiration from this concept into reviving the Indian Economy on the 19th of December by purchasing Rs. 10,000 crore worth of 10-year government bonds while selling four shorter-term government bonds adding up to the same value. This would have tremendous significance in moderating the high long-term interest rates in the market and bringing them closer to the repo rate. On the 30th of December, Reserve Bank again bought 10-year bonds worth Rs.10,000 crore while selling one-year bonds worth Rs.8501 crore.
Now, the dilemma amongst citizens lies in the fact as to how will this benefit the markets and as a consequence, the economy?
India’s economy is reeling under pressure due to a couple of factors, namely, the slump in demand and lower consumption. The central bank slashed the repo rate by a cumulative number of 135 basis points only to witness relatively sluggish growth in demand. This resulted mostly because Indian Banks failed to transmit the cumulative rate cut passed on by RBI this year. They even failed to pass on lower interest rates to customers despite RBI’s mandate to link lending rates with its external benchmark.
In such a situation, if the Central Bank buys more long-term security and sells off short-term ones, the bond yield- the return an investor gets on his holding comes down significantly. Since long-term bond yield represents a key market interest rate, lower rates would aid people to avail more long-term loans thereby bringing down the overall borrowing costs for the government.
So, did the move have an impact on the bond yields?
The recent Operation Twist impacted bond yields that had shot up to 6.705% on 18 December. The move was announced on 19 December 2019 and yields moderated to 6.501% on 1 January 2020. Ending uncertainty on fiscal deficit numbers for 2019-20 and 2020-21 and a credible long-term fiscal consolidation path will help moderate bond yields.
How would Operation Twist benefit us all?
This operation would prove highly beneficial for the fixed-income investor as softening yields of long-term bonds would help benefit his portfolio. The benefit extends to consumers and borrowers as well. The increasing yields on long-term government borrowings were leading banks to price their retail loans at high rates which can now be expected to get slightly cheaper thereby boosting consumption spending which accounts for a good chunk of the Gross Domestic Product (GDP). The lower interest rates would represent a lucrative option for investors who wish to take more loans for long-term investments.
In the process, the flow of money will increase in the country thereby boosting aggregate demand in all the sectors. This would highly benefit the economy in terms of pump-priming employment opportunities as higher aggregate demand would eventually push up the production thereby increasing the need for further labor generation in the economy thereby reducing unemployment levels.
All in all, Operation Twist would serve a holistic approach in boosting job creation as well as reviving investment opportunities in the Indian Economy thereby climbing the growth ladder.
Bidisha Bhattacharya works ScrollStack. Prior to
this she was a Consultant to the Fifteenth Finance Commission, Government of India and has worked as a Political Researcher in Prashant Kishor’s Strategic Research and Insights (SRI) team at I-PAC.