what is RBI's Operation Twist?
'Operation Twist' is a monetary policy operation adopted by the central bank of a country to revive the growth of the economy. It is the RBI's simultaneous selling of short term securities and buying long term securities through Open Market Operation(OMO). It will purchase long term government bonds, i.e maturing in 2029 and simultaneously sell short term government bonds, i.e maturing in 2020. Reserve Bank of India(RBI) will conduct purchase and sell of government securities for Rs 10000 crore each through OMO.
Under this mechanism, short term securities transitioned into long term transition. When there is a long term investment deficit and investors are hesitant to invest in long term securities, then the government is using this tool to revive the economy by lowering the long term interest rate.
'Operation Twist' first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
Why Operation Twist is conducted?
If there is a shortfall in long term investment in the and the investors are reluctant to do long term investment in the economy, then the government reduces interest rates for the long term investment.
Long term investment will create jobs which would increase the demand for other products. Hence, due to this, holistic development would take place.
How does RBI's'Operation Twist' work?
There is an inverse relationship between bond prices and their yields. Yield is the return of an investor gets on his investment/holding. When RBI buys long term securities, their demand rises which in turn increases their prices. However, the bond yield comes down as price increases. The rate of interest of an economy is determined by yield. Lower the bond yield indicates a lower interest rate. Thus, lower interest Rate means people can avail long term loans i.e. buying a house, cars etc.at a low-interest rate. However, the cheaper retail loan can help to encourage consumer spending which in turn revives the economic growth of a country.
Benefits of Operation Twist
Investors will take more loans in the long term investment because of low-interest rates. Therefore the flow of money will increase in the economy and aggregate demand in all sectors will boost. As a result, more job opportunities will be created and economic growth will take place.
Thus, RBI's 'Operation Twist' is a positive sign for the growth of an economy. It will boost investment and atmosphere of job creation can be ensured in the economy.
Under this mechanism, short term securities transitioned into long term transition. When there is a long term investment deficit and investors are hesitant to invest in long term securities, then the government is using this tool to revive the economy by lowering the long term interest rate.
'Operation Twist' first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
Why Operation Twist is conducted?
If there is a shortfall in long term investment in the and the investors are reluctant to do long term investment in the economy, then the government reduces interest rates for the long term investment.
Long term investment will create jobs which would increase the demand for other products. Hence, due to this, holistic development would take place.
How does RBI's'Operation Twist' work?
There is an inverse relationship between bond prices and their yields. Yield is the return of an investor gets on his investment/holding. When RBI buys long term securities, their demand rises which in turn increases their prices. However, the bond yield comes down as price increases. The rate of interest of an economy is determined by yield. Lower the bond yield indicates a lower interest rate. Thus, lower interest Rate means people can avail long term loans i.e. buying a house, cars etc.at a low-interest rate. However, the cheaper retail loan can help to encourage consumer spending which in turn revives the economic growth of a country.
Benefits of Operation Twist
Investors will take more loans in the long term investment because of low-interest rates. Therefore the flow of money will increase in the economy and aggregate demand in all sectors will boost. As a result, more job opportunities will be created and economic growth will take place.
Thus, RBI's 'Operation Twist' is a positive sign for the growth of an economy. It will boost investment and atmosphere of job creation can be ensured in the economy.
Awesome sir
ReplyDeleteWell explained. Keep it up Borthakur.
ReplyDeleteGreat going
ReplyDeleteExcellent work
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