‘Operation Twist’ in desi avatar
The Reserve Bank of India (RBI) has commenced something that is akin to the famous “Operation Twist” conducted by the US Federal Reserve by deciding to buy the long-tenor 10-year benchmark bonds worth Rs. 10,000 crore and selling four short-dated securities worth the same amount under open market operations (OMOs). On 19 December 2019, the RBI said it would be buying the 6.45% yielding notes maturing in 2029 — the benchmark bonds — and would be selling four papers maturing in 2020.
- The step is liquidity neutral — meaning the OMOs would not be adding any further liquidity to the system that is already flush with excess liquidity to the tune of over Rs. 2 lakh crore.
- The simultaneous purchase and sale of securities would also help in flattening the steep yield curve — where long tenor yields have been high and short-term yields have been low.
- For instance, despite a 60 bps reduction in the repo rate across two monetary policies in August and October, the benchmark yield remains higher by 38 basis points since August.
- At the same time, the system liquidity has been so high that short-tenor yields have remained fairly low. In some instances, even the 364-day treasury bill yield has gone below the repo rate — a not so usual occurrence.
- It is an acknowledgement from RBI, after their surprise policy where they did not cut rates, that term premia in the government securities market is hovering around all time high.
- This is a signal to the market that the central bank might intervene to calm the rising yields. My view is that there could be more OMOs like these. However, the market will wait out for the final jury on the Budget day when we will come to know what kind of fiscal deficit does the government announced.
- During the December monetary policy when the RBI governor was asked about the possibility of an Operation Twist, he did not make any specific comments on the matter.
- Experts believe that the central bank may do more of these OMO purchases/sales in coming times that will eventually bring down excess supply of long-tenor bonds in the market.
What is the US Fed’s ‘Operation Twist’?
- Operation Twist is the name given to a monetary policy tool that the Jerome Powell-led US Federal Reserve had started to influence the rate of interest in the world’s largest economy.
- The process involves buying and selling of both short- and long-term government bonds — depending upon its objective relating to rates — at the same time.
- The method was later adopted by several other central banks.