Operation Twist refers to the movement of the yield curve when central banks simultaneously buy and sell securities of short term and long term period.
This operation is usually used by US Federal Reserve.
Recently Reserve Bank of India(RBI) announced a simultaneous sale and purchase of government securities under open market operations for Rs. 10,000 crore.
Need for the operation:
- Economic slowdown
- Consumer’s demand is weak
- Global slowdown
- Reduced savings by the people, so it impacts credit growth
After the announcement of RBI, government long term bond yields fallen considerably.
Open Market Operations:
It means the sale and purchase of government securities by the RBI and it’s not binding on the banks. In periods of excess liquidity, RBI resorts to sale of government securities to banks draining out the money thus reducing liquidity. For increasing liquidity, it purchases securities from banks thereby transferring money to banks to lend resulting in liquidity increase. Sale of government securities reduces money supply in the economy and purchase of government securities pushes up the money supply.