The RBI conducts operation twist to manage yields in the bond market
The banking regulator is back with ‘operation twist’ or what markets call open market operations (OMO), under which the Reserve Bank of India (RBI) conducts simultaneous sale and purchase of bonds.
On June 29, the Reserve Bank of India (RBI) announced another round of ‘operation twist’ on July 2 for Rs 10,000 crore each for sale and purchase of bonds.
Why does RBI conducts simultaneous sale and purchase of bonds?
RBI undertakes operation twist to manage yields in the bond market. The idea is to raise short-term yields and lower long term yields. Earlier, the central bank conducted ‘operation twist’ a few times. This exercise technically benefits the government, which can borrow from the market at a cheaper rate. Lower yields could also influence interest rates in the corporate bond market.
However, lower bond yields often don’t translate into higher bank lending since credit offtake is a function of demand and economic activity.
This time, the central bank will purchase government securities maturing between 2027 and 2033, while it sells short-term bills maturing in October and April 2021.
The result of the auctions will be announced on the same day and the RBI reserves the right to accept or reject any or all the bid/offers either wholly or partially without assigning any reasons, it said.
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First Published on Jun 29, 2020 05:36 pm