Operation Twist is a move in which a central bank decides to simultaneously buy long-dated securities while selling short-term securities. This is the first time RBI has undertaken such an unconventional policy measure with the aim of flattening the yield curve by lowering longer-term rates to boost lending and growth.
- Operation Twist normally leads to lower longer-term yields, which will help boost the economy by making loans less expensive for those looking to buy homes, cars and finance projects, while saving becomes less desirable because it doesn’t pay as much interest.
- As the central bank buys more long-term security and sells off short term bonds, the bond yield i.e. the return an investor gets on his holding – comes down significantly. Since long-term bond yield (10-year government securities) is a key market interest rate, lower rates can help people avail more long-term loans. It also helps in bringing down overall borrowing costs for the government.
- Lower long-term interest rates would provide more liquidity to the market. Anything that increases the demand for long-term government bonds puts downward pressure on the interest rate and less demand for bonds tends to put upward pressure on interest rates.