In this Mint article, Niranjan Rajadhyaksha, Research Director and Senior Fellow at IDFC Institute, examines if it is time for India's own version of US inspired Operation Twist, which involves selling short-term bonds and buying long-range securities.
This comes in the background of slowdown of economic momentum in all the major economic areas, including India. "There are indications of a slowdown in almost every major economic area—the US, China, Europe, Asia, Japan. The Indian economy is also losing momentum. Indian economic growth in the fourth quarter of the fiscal year that ends on 31 March is likely to be around 1.7 percentage points lower than in the first quarter."
Issues that concern the RBI governor, besides the level of policy rates are summarised as "The Indian central bank has been less successful in dealing with yields on bonds with longer maturity. The problem is that the heavy borrowing by the government, combined with a revival in bank credit growth, is putting upward pressure on interest rates despite the anticipated reductions in policy rates. The domestic yield curve has been steepening because of what one economist described to me as “fiscal fatigue" in the markets.
One option right now is to borrow a trick from the US Federal Reserve—Operation Twist, named after the dancing style that was all the rage in the years after World War II. There have been two famous instances when the US central bank “twisted" a steep yield curve through clever money market operations, first in 1961 and then in 2011. In each case, the Fed changed the relative amounts of short-term and long-term securities in the market. How? It sold the short-term treasuries it had and used the proceeds to buy long-term securities. The result was that short-term interest rates went up while long-term interest rates came down. The yield curve flattened."
Read the complete article here.