What is the "Operation Twist" of the RBI and why has it been initiated?
India's central bank; RBI has launched 'Operation Twist' on 23 December 2019. This operation has been launched to increase the long term investment in the country. Before knowing about this 'Operation Twist', it is necessary to know its history.
History of Operation Twist
Actually, the term ‘Operation Twist’ was first used in dance in America. A dance of ‘Chubby Checker’ became very famous in the year 1961. In the dance, chubby danced while twisting his feet.
Worth to mention, the US economy was recovering from recession post the Korean War in 1961.
At that time, the Kennedy administration had tried to boost spending in the economy of America by using the ‘Operation Twist’.
However, the US Federal Reserve had used 'Operation Twist' between 2011 and 2012 to bring down long term interest rates in the country’s money market.
It is clear from the picture given below that the Federal Bank first sold short-term securities and then bought long-term securities with that money.
What is operation Twist?
In simple words, 'Operation Twist' means that the government or the country's Monetary Authority; sells the short term securities and buys long term securities simultaneously through Open Market Operations (OMO).
So in the operation twist; the short term securities are converted into long term securities.
Why Operation Twist is conducted?
If there is a shortfall in long term investment in the country and the investors are reluctant to do long term investment in the economy, then the government tries to reduce the interest rate for the long term investment ventures.
These long term investment venture includes; purchase of land/house, investment in infrastructure and securities, etc.
The long-term investment will create jobs in the country which would lead to an increase in the demand for other products. So due to a positive atmosphere in the country, the holistic development of the entire country would take place.
How RBI conducted Operation Twist?
On 23 December 2019, the Reserve Bank of India, sold short-term securities worth Rs 10,000 crore through the Open Market Operations (OMO) and purchased long term securities of the same value.
The maturity period of the short term securities was up to 2020 but the maturity period of long term securities is for 10 years or up to 2029.
The sole purpose of this twist is to moderate high long-term interest rates in the market and bring them closer to the repo rate.
The advantage of this operation is that now people will get the loan at cheaper rates to invest in long term securities. So people will be interested in taking loans in large quantities to purchase houses, set up industries,etc.
Since there is a situation of the slowdown in the country at this juncture, people are not investing, so the demand is decreasing in every sector like the reduction in demand for homes, cars, etc. Now the government wants to provide cheaper loans through operation twist.
Benefits of Operation Twist
1. The interest rate for the long term investment will come down so the investor will take more loans for long term investments.
2. The flow of money will increase in the country, and aggregate demand in all sectors of the economy will boost.
3. The overall increase in productive activities will further create jobs in the economy.
Thus, it is clear from the above description that RBI has started ‘Operation Twist’ so that the atmosphere of job creation and investment can be ensured in the country.