InvestorQ : What is this Operation Twist that the government of India has undertaken and what exactly does this operation mean for financial markets?
Chandralekha Desai made post

What is this Operation Twist that the government of India has undertaken and what exactly does this operation mean for financial markets?

Rashi Mehra answered.
1 year ago
The idea behind Operation Twist is to twist the yield curve. Reserve Bank of India (RBI) has recently announced that it will purchase Rs 100 billion of the 6.45%, 2029 bond and simultaneously sell an equal amount of debt maturing in 2020 via an auction. Experts and analysts believe that this ‘Operation Twist’ is aimed at bringing longer-term yields lower.

Bonds have already been under pressure over the past few sessions after global rating agency S&P warned that it may downgrade India's debt, and as the RBI in the last policy review meeting decided to keep rates on hold. 
With the news, 10-year bond yield closed at 6.619% as compared to the previous close of 6.75%, therefore the news has lowered the bond yield in the market. However, experts believe that in the long-run this could help investors to gain stability over their returns. 

By buying securities in the market central bank can increase the money supply. However, if it also sells securities of the same amount, it will hardly create any difference in the flow of money.

Since the idea behind Operation Twist is to drive down the yields on 10-year government securities. This can happen only if the government continues with Operation Twist. A one-off operation will not help and yields will climb back soon.

Mitali Bhutta answered.
2 years ago

This operation twist was launched in the aftermath of the monetary policy announcement which saw a sharp spike in 10-year bond yields in India. The yields shot up from 1.45% to 1.75% in a short span of time after the RBI decided to maintain status quo on repo rates. The financial markets were heavily betting on a 25 bps rate cut or higher and that had already been factored into the bond yields. In addition, the RBI made inflation control its core objective and that almost ruled out further rate cuts. That was the reason yields on the ten year benchmark spurted after the status quo on rates was announced in the monetary policy. This was the basis for the RBI’s Operation Twist.

Let me now focus on why and how this Operation Twist is being done? This operation is an attempt by the RBI to regulate yields at the long end of curve. This is done by the RBI buying bonds at the long end and selling bonds at the short end of the curve. This results in more demand for bonds at the long end. This increases the price of these bonds and therefore reduces the yields. At the same time, the sale of bonds at the short end will bring down the prices and raise the yields. In the last few months, the yields at the shorter end of the curve had been falling due to a glut of liquidity. At the same time, the longer end yields had shot up due to higher inflation and also higher inflation expectations. Operation Twist will narrow the yield spread between the short end and the long end making bond markets more predictable.