To start with, the OPERATION TWIST is a US federal bank’s monetary policy , which first appeared in 1961 when the Federal Open Market Committee (FOMC) sought to strengthen the U.S. dollar and stimulate inflows of cash into the economy. At this time, the country was still recovering from a recession following the end of the Korean War. In order to promote spending in the economy, the federal bank started the purchase and sale of bonds. The operation describes a form of monetary policy where the Federal bank buys and sells short-term and long-term bonds to strengthen the U.S. dollar and stimulate cash flow into the economy.
Due to the economic crisis situation in India which led to decrease in the investment rates, the RESERVE BANK OF INDIA (RBI) is going to conduct a simultaneously buying and selling of government securities under Open Market Operations of worth ₹10,000 crore each on December 23 — a move aimed at managing the yields following the OPERATION TWIST of US.
OPEN MARKET OPERATIONS :
1)Open Market Operation (OMO) is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
2)OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
3)The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.
4)These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
5)RBI carries out the OMO through commercial banks and does not directly deal with the public.
6)The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
Benefits of Operation Twist :
1)This simultaneous purchase and sale will bring down interest on long term loans which can lead to increase in economic spending.
2)OMOs are primarily done to maintain ample liquidity in the system, which reflects that the RBI is keen that banks should transmit lower rates to borrowers.
3)The action of Operation Twist by the RBI is encouraging for the market. This step may become a driving factor for long-term economic activity and the addition of new investment stock.