RBI's 3rd 'Operation Twist' on January 6 to Improve Transmission

Mumbai: A central bank 'Operation Twist' of the new calendar year began on Thursday with the Reserve Bank of India (RBI) announcing the simultaneous purchase and sale of government securities through special open market operations (OMOs) for Rs 10,000 crore each on January 6.

In December, the RBI had for the first time ever conducted a special OMO, similar to the 'Operation Twist' carried out in the US around the start of the last decade. A conventional 'Operation Twist' involves a central bank buying and selling securities of the same amounts.

This will be the first time the RBI will be buying and selling securities of the same amount.

Operation Twist involves a central bank simultaneously buying long-dated securities, while selling short-term securities. The objective is the management of the yield curve.

Other central banks, besides the US Federal Reserve, have used similar measures. A conventional such operation involves a central bank buying and selling securities of the same amounts.

After banks in the country showed reluctance about transmitting the lower RBI rates, the central bank decided to undertake its own version of 'Operation Twist' to bring down 10-year yields of government securities (G-Secs) and push monetary transmission.

In the first tranche, the central bank purchased securities worth Rs 10,000 crore and sold bonds worth Rs 6,825 crore.

Later, in the second special open market operation (OMO), the RBI bought Rs 10,000 crore of long-term government securities and sold Rs 8,501 crore of three short-term bonds.

"On a review of the current liquidity and market situation and an a ssessment 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 crore each on January 6, 2020," an RBI statement said.

The results of the auction will be announced on January 7, the RBI said.

The central bank also said it reserves the right to accept or reject any or all of the bids or offers either wholly or partially without assigning any reasons.

With banks passing on only a small part of rate cuts, RBI has been forced to think of unconventional ways to lower rates.

With the benchmark 10-year G-Sec yield at an elevated level for quite some time, despite a series of rate cuts by the central bank, economists believe this special move could help transmission of rates in the economy.