From UPSC perspective, the following things are important :
Prelims level : Operation Twist, OMOs
Mains level : Operation Twist
The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.
- Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
- It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
- It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
- The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.
- The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
- If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
- To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.
Back2Basics: Open Market Operations
- Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
- The objective of OMO is to regulate the money supply in the economy.
- When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
- OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.