21 December, 2019
Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Prelims and Mains focus: About Operation Twist and its significance; RBI: structure and functions
News: The yield on the 10-year government bond fell 15 basis points on Friday, its steepest fall in two months, after the Reserve Bank of India (RBI) conducted a special open market operation—simultaneously buying long tenor bonds and selling short-tenor government bonds—dubbed ‘Operation Twist’ by the market.
The concept was drawn from US Federal Reserve’s Operation Twist that was announced in September 2011 and ran through end-2012 to make long-term borrowing cheaper and spur bank lending. The Fed had swapped short-term bonds for longer-term debt. The policy was effective as the term premium dropped to a low of 33 bps in mid-2012, from around 70 bps.
Objective of Operation Twist
The simultaneous sale and purchase operation has a two-pronged objective:
The yield on the 2029 benchmark bond fell as much as 15 bps to 6.604%, the steepest fall since 9 October. While the yield on the 14-year government paper slid 20 bps, the yield on the 2020 bond jumped 5 bps. One basis point is a hundredth of a percentage point.
The RBI on Thursday said it will purchase Rs.10,000 crore of the 10-year benchmark bonds, and sell an equal amount of debt maturing in 2020 through an auction on 23 December, making Operation Twist liquidity-neutral.
Significance of the move
Analysts will now await the Union budget to see if the government is able to meet its fiscal deficit targets.
While the current operations of the RBI may temporarily start reining in term spreads, the government also needs to actively court foreign capital to part-finance its deficit, at least in the near term. This can be rule-based to avoid risk of excesses, but must be done for now given the stark paucity of domestic savings.
Hilton Young Commission
Hilton-Young Commission was the Royal Commission on Indian Currency and Finance set up by British Government of India in 1920s. In 1926, this commission had recommended to the government to create a central bank in the country. On the basis of mainly this commission, the RBI act was passed.
Headquarters of RBI
Original headquarters of RBI were in Kolkata, but in 1937, it was shifted to Shahid Bhagat Singh Marg, Mumbai.
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