RBI to carry out US-style 'Operation Twist' to bring down interest rates

In a first, the Reserve Bank of India (RBI) announced a simultaneous sale and purchase of government bonds under the Open Market Operations mechanism, on lines of the “Operation Twist” that was last adopted by the US Federal Reserve in 2013.

‘Operation Twist’ is when the central bank uses the proceeds from sale of short-term securities to buy long-term government debt papers, leading to easing of interest rates on the long term papers.

“On a review of the current liquidity and market situation and an assessment of the evolving financial conditions, the Reserve Bank has decided to conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for Rs 10,000 crores each on December 23, 2019,” the central bank said on December 19.

Under the OMO, RBI will sell four securities maturing in 2020 and will purchase the 6.45 percent government bond maturing in 2029.

RBI said that it reserves the right to decide the quantum of the OMOs and may accept or reject any or all bids either wholly or partially without assigning reasons.

RBI’s OMO mechanism allows the central bank to manage liquidity conditions in the banking system by sale or purchase of government bonds via open auctions.

Long-term government bond yields remained sticky despite surplus system liquidity and back-to-back policy rate cuts of 135 basis points between February-October this year. Concerns on higher market borrowings by the government on risks of likely fiscal slippage have weighed on the bond yields.

The yields on the 10-year benchmark government bond have risen by around 40 basis points since December 5, when the Monetary Policy Committee took an unexpected pause on rate cuts on concerns of rising inflation.

There were hopes that the Indian central bank might resort to measures like ‘Operation Twist’ to ease the long-term rates.