Benefits of RBI’s Operation Twist

Benefits of RBI’s Operation Twist

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

Banks may be able to make use of Operation Twist to free up capital for long-term investments and lending opportunities. It has been a positive and prompt response to the effort to restore the Indian economy's health. Other advantages include:

1. Needs of the customer: Banks receive the remaining long-term funds, which they lend to consumers for the purchase of homes, automobiles, or projects at lower interest rates.

2. Cost of bonds: The demand for long-term securities (bonds) rises when the central bank issues them, which raises their prices. The security yield diminishes with a cost increment (converse relationship). Interest rates decrease as a result of the low yield.

3. Bank business: Banks are required by CRR and SLR regulations to hold some government securities. Activity turn empowered the selling of their drawn out securities to the public authority since they have the trepidation to lose on yield assuming that they held it for additional time.

4. Stagflation disappearing: The economy's overall demand increased as a result of the bank's increased borrowing from consumers. This force to the market could safeguard the Indian economy from slipping into stagflation because of the slacking economy in Coronavirus emergency.

5. Effect on the Investor: The decrease in the yield on long-term bonds will be beneficial to investors who previously made investments in securities with a fixed income in relation to long-term debts. Borrower and customers would benefit from lower interest rates on retail loans if the same scenario occurs. In the end, this will encourage spending and consumption in the economy and contribute to its revival and expansion.

6. Rate of interest and yield curve: The relationship between yield and price is inverse. RBI acquisition of long haul securities raises the security cost and brings down the yield. When the RBI sells short-term bonds, bond prices go down and yields go up at the same time. In this scenario, the RBI purchases long-term government securities and sells short-term government securities, resulting in high demand for government securities. Investors benefit from higher bond prices compensating for lower yields on long-term securities.