InvestorQ : Can you please tell me in detail as to how this Operation Twist will work and how will it impact stocks?
Chandralekha Desai made post

Can you please tell me in detail as to how this Operation Twist will work and how will it impact stocks?

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Mitali Bhutta answered.
2 years ago
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Let us first look at how exactly Operation Twist will work in the bond markets? Operation Twist is being launched in the bond markets on 23rd December, Monday. Here is how it will be actioned in practice. It will be structured as a special Open Market Operation (OMO), wherein the RBI will buy and sell bonds to the tune of Rs.10,000 crore in the first tranche. The proceeds from sale of short-term securities will be used to buy long-term government securities or bonds to bring down interest rates on long-term securities. RBI will buy 6.45% 2029 G-Secs worth Rs.10,000 crore and fund that by selling shorter maturity government bonds maturing in 2020 across a wide yield spectrum. Of course, the RBI will have the final discretion of accepting or even rejecting the bids.

Let me now talk about the implications of this Operation Twist. Apart from the fact that it normalizes the gap between long yields and short yields, it has immediate implications too. For example, the sharp fall in the bond yields will result in a spike in the bond prices and that would be beneficial to banks and other holders of government securities as we approach the end of the year. Additionally, Operation Twist can also be a useful signalling tool for the government. It gives a clear hint that the government stands to protect the yields in a range to maintain bond price stability. That is a big positive!

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