RBI launches special operation to forcefully lower interest rates
MUMBAI: To forcefully bring down the rate of interest in the economy, the RBI on Thursday said it would buy government securities (G-Secs) with a 10-year maturity while, at the same time, sell government bonds with just one-year maturity — both worth Rs 10,000 crore each.
Globally termed as ‘Operation Twist’ for quite some time, economists have been expecting the central bank to launch this special manoeuvre so that rate cuts since February this year could lead to a commensurate drop in rate of interest in economy.
Although the RBI has cut interest rate five times this year by a total of 135 basis points (100bps = 1 percentage point), the yield on the 10-year G-Secs has come down by 80bps — from 7.55% in early-February to its Thursday close of 6.75%. Even less has been the drop in rate of interest that banks charge to their borrowers. This indicates that although the central bank has cut rates so that the rate of interest in the economy also comes down commensurately and helps in reviving the slowing economic growth, in practice that has not happened.
RBI said on December 23, it will buy 10-year G-Secs worth Rs 10,000 crore and, on the same day, it will also sell one-year bonds of four varied tenures worth Rs 10,000 crore in all. Since the price of a bond and the yield on it move in opposite directions, buying of a bond pushes up its price and pulls down the yield. By buying 10-year bonds, the RBI wants to bring down the benchmark yield — one of the main determinants of the rate of interest banks charge their borrowers.
“Buying 10-year G-Secs and selling one-year bonds amid a surplus liquidity situation will ensure flattening of the yield curve with longer end of the curve coming down. This is primarily aimed at better transmission of recent monetary easing by the RBI to revive growth,” said a debt fund manager. Economists believe that this will probably be the first of RBI’s ‘Operation Twists’ and it would resort to some more of this method to pull down the rate of interest in the economy.