Online Courses (English)
This just in:

State PCS

Daily Updates

Indian Economy

RBI to Restart Operation Twist

  • 24 Apr 2020
  • 4 min read

Why in News

The Reserve Bank Of India (RBI) has decided to conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for ₹10,000 crore each on April 27, 2020 considering the current and evolving liquidity and market conditions.

  • Such Open Market Operations are known as ‘Operation Twist,’ which was used by the RBI in December, 2019 for the first time.

Key Points

  • Operation Twist is the RBI's simultaneous selling of short-term securities and buying of long term securities through Open Market Operations (OMO) in order to bring down long-term interest rates and bolster short-term rates.
    • Operation Twist was first used in 1961 by the US Federal Reserve (central bank) as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
  • Under this mechanism, the short-term securities are transitioned into long-term securities.
  • Impact of Operation Twist:
    • As the central bank buys long-term securities (bonds), their demand rises which in turn pushes up their prices.
    • However, the bond yield comes down with an increase in prices (inverse relationship).
      • Yield is the return an investor gets on his (bond) holding/investment.
    • The interest rate in an economy is determined by yield. If yield is low, interest rates decrease.
    • Thus, lower long-term interest rates mean people can avail long-term loans (such as buying houses, cars or financing projects) at lower rates.
    • This will lead to a boost in consumption and spending in the economy which in turn will revive the growth.

Government Security

  • A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
  • It acknowledges the Government’s debt obligation. Such securities are:
    • Short term securities
      • They are usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91 day, 182 day and 364 day.
    • Long term securities
      • They are usually called Government bonds or dated securities with original maturity of one year or more.
  • In India, the Central Government issues both treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
  • G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Open Market Operations

  • Open Market Operations (OMO) is one of the quantitative monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
    • Other monetary policy tools are such as repo rate, cash reserve ratio and statutory liquidity ratio, etc.
  • OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
    • RBI carries out the OMO through commercial banks and does not directly deal with the public.
  • The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.

Source: TH

SMS Alerts

Please login or register to view note list


Please login or register to list article as bookmarked


Please login or register to make your note


Please login or register to list article as progressed


Please login or register to list article as bookmarked