Logic of Operation Twist

Logic of Operation Twist

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The RBI forces Operation Twist to lower long-term interest rates so that the general public can borrow at lower rates, resulting in an increase in credit, consumption, and investment. Likewise, the public authority can get at a lower loan cost to fund the monetary shortage. India does not fine-tune the Monetary Policy Transmission Mechanism. For instance, in 2019, the RBI slashed the repo rate, or key interest rate, by 1.35 percent, but banks only accepted a portion of it. Only 0.5% has been lost in the one-year median marginal cost of funds based lending rate (MCLR). As a result, we can see that the conventional approaches were insufficiently successful.

Under Open Market Operations, the Reserve Bank of India (RBI) conducted a transaction involving the simultaneous purchase and sale of government securities. The sum was for 10,000 crores in light of the common current and developing liquidity economic situations in April 2020. A comparable activity was first led in December 2019. The RBI operation, like the American operation Twist, was carried out through Open Market Operations by selling short-term securities and buying long-term securities to lower long-term interest rates.

The majority of businesses were not taking out loans because interest rates remained high. The expansion of credit was incredibly sluggish. In light of the fact that the growth rate of India's gross domestic product (GDP) was below 5%, it was necessary to lower the effective interest rate in order to reenergize the economy and encourage investment. Because of this, RBI had to use the unconventional monetary policy known as "Operation Twist." Seven Important Facts About Operation Twist are:

1. The Reserve Bank of India's monetary policy is known as Operation Twist.

2. The RBI has adopted this unconventional monetary policy.

3. The Open Market Operation (OMO) of the RBI includes Operation Twist.

4. RBI purchases and sells government securities simultaneously as part of Operation Twist.

5. The Reserve Bank of India (RBI) trades short-term government securities for long-term government securities.

6. The motivation behind Activity Bend is to lessen the loan fee of long haul government bonds.

7. As the pace of revenue gets decreased, both people in general and the public authority can get at a less expensive rate. The purpose of this is to boost the economy.