RAS question
What is 'Operation Twist' in the context of RBI's monetary operations?
Correct answer: (D) Simultaneous buying of long-term and selling of short-term government securities.
In RBI monetary operations, Operation Twist is the simultaneous purchase of long-term government securities and sale of short-term government securities.
Explanation
Operation Twist is a special open market operation in which the RBI buys long-term government securities while selling short-term government securities, usually in comparable amounts. The point is not to print money or block credit, but to alter the maturity profile of securities held by the market. By buying longer-term securities, the RBI pushes their yields down; by selling shorter-term securities, it keeps short-term conditions from loosening too sharply. This flattens the yield curve, supports monetary transmission and lowers borrowing costs. The Reserve Bank of India release confirms that its unconventional 'operation twist' involved the simultaneous sale of short-term government securities and purchase of long-term securities, alongside other liquidity measures.
Why the other options are wrong
- (A) Printing new currency notes is currency issuance, whereas Operation Twist works through buying and selling government securities of different maturities.
- (B) Converting foreign currency reserves into gold concerns reserve composition, not RBI's simultaneous short-term sale and long-term purchase of government securities.
- (C) Restricting bank lending would tighten credit directly, while Operation Twist aims to support monetary transmission and ease longer-term borrowing conditions.
Concept
This tests monetary policy instruments, especially open market operations and the yield curve. It recurs in RAS because RBI's conventional and unconventional liquidity tools are central to Indian Economy questions.