A few months earlier, the Central Bank of India came\nup with a fascinating code name that hadn\u2019t taken much time to reach its\ntrending peak since its very inception: Operation Twist. Rolled out by the RBI,\nthe mission was all set to benefit the citizens of the country with a\nsignificant amount of benefits. <\/p>\n\n\n\n
But the question arises as to what is the twist all\nabout?<\/p>\n\n\n\n
Operation Twist was the name coined for a monetary\npolicy tool by the US Federal Reserve with a far-fetched motive to influence\nthe prevailing interest rate in the markets. The tool essentially aims at\nchanging the shape of the yield curve through the simultaneous buying and\nselling of short-term and long-term government securities. The Central Bank put\nin inspiration from this concept into reviving the Indian Economy on the 19th\nof December by purchasing Rs. 10,000 crore worth of 10-year government bonds\nwhile selling four shorter-term government bonds adding up to the same value.\nThis would have tremendous significance in moderating the high long-term interest\nrates in the market and bringing them closer to the repo rate. On the 30th of\nDecember, Reserve Bank again bought 10-year bonds worth Rs.10,000 crore while\nselling one-year bonds worth Rs.8501 crore.<\/p>\n\n\n\n
Now, the dilemma amongst citizens lies in the fact as\nto how will this benefit the markets and as a consequence, the economy?<\/p>\n\n\n\n
India\u2019s economy is reeling under pressure due to a\ncouple of factors, namely, the slump in demand and lower consumption. The\ncentral bank slashed the repo rate by a cumulative number of 135 basis points\nonly to witness relatively sluggish growth in demand. This resulted mostly\nbecause Indian Banks failed to transmit the cumulative rate cut passed on by\nRBI this year. They even failed to pass on lower interest rates to customers despite\nRBI\u2019s mandate to link lending rates with its external benchmark. <\/p>\n\n\n\n
In such a situation, if the Central Bank buys more\nlong-term security and sells off short-term ones, the bond yield- the return an\ninvestor gets on his holding comes down significantly. Since long-term bond\nyield represents a key market interest rate, lower rates would aid people to\navail more long-term loans thereby bringing down the overall borrowing costs\nfor the government.<\/p>\n\n\n\n
So, did the move have an impact on the bond yields?<\/p>\n\n\n\n
The recent Operation Twist impacted bond yields that\nhad shot up to 6.705% on 18 December. The move was announced on 19 December\n2019 and yields moderated to 6.501% on 1 January 2020. Ending uncertainty on\nfiscal deficit numbers for 2019-20 and 2020-21 and a credible long-term fiscal\nconsolidation path will help moderate bond yields.<\/p>\n\n\n\n
How would Operation Twist benefit us all?<\/p>\n\n\n\n
This operation would prove highly beneficial for the\nfixed-income investor as softening yields of long-term bonds would help benefit\nhis portfolio. The benefit extends to consumers and borrowers as well. The\nincreasing yields on long-term government borrowings were leading banks to\nprice their retail loans at high rates which can now be expected to get\nslightly cheaper thereby boosting consumption spending which accounts for a\ngood chunk of the Gross Domestic Product (GDP). The lower interest rates would\nrepresent a lucrative option for investors who wish to take more loans for\nlong-term investments.<\/p>\n\n\n\n
In the process, the flow of money will increase in the\ncountry thereby boosting aggregate demand in all the sectors. This would highly\nbenefit the economy in terms of pump-priming employment opportunities as higher\naggregate demand would eventually push up the production thereby increasing the\nneed for further labor generation in the economy thereby reducing unemployment\nlevels.<\/p>\n\n\n\n
All in all, Operation Twist would serve a holistic\napproach in boosting job creation as well as reviving investment opportunities\nin the Indian Economy thereby climbing the growth ladder.<\/p>\n","protected":false},"excerpt":{"rendered":"
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.<\/p>\n","protected":false},"author":23,"featured_media":95845,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","footnotes":""},"categories":[3],"tags":[277,49,276],"class_list":["post-95844","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-indian-economy","tag-operation-twist","tag-rbi","tag-yield-curve"],"yoast_head":"\n