InvestorQ : What does the latest round of Operation Twist by the RBI propose to do?
diksha shah made post

What does the latest round of Operation Twist by the RBI propose to do?

Answer
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3 months ago


There were no Operation Twists for some time now and now RBI will initiate another round of Operation Twist on July 02. This is intended to bring more stability to the bond markets. The Operation Twist has been implemented by the RBI in the past prior to the lockdown but it has restarted the process only now after a gap of nearly 3 months.

The gist of the Operation Twist is that the Reserve Bank of India buys and sells bonds worth Rs.10,000 crore by tweaking contra positions at the long end and the short end of the yield curve. Either, it is short buy and long end sell or it can also be the other way round. This helps smoothen the spread between the long term yields and the short end yields.

The RBI normally uses this as a liquidity management measure and also to avoid the yield curve from flattening or inverting. Normally, yield curve flattening or inverting is an indication of impending slowdown. Also, there may be some mismatch due to the volatility in bond markets and that can be made smooth by Operation Twist.