The central bank Thursday announced yet another instalment of `Operation Twist' to help reduce yields on longer tenor sovereign debt, which now carries higher costs despite a 75-basis-point cut in interest rates late last month. The central bank has proposed to buy - and sell - government bonds worth Rs.

10,000 crore under each head.

It will buy longer tenor bonds with 6-10 year maturities while simultaneously selling shorter duration papers maturing between June this year and April next.

The auction is scheduled to take place next Monday. In an unscheduled policy, the Reserve Bank of India (RBI) cut the repo - the rate at which banks borrow short-term money - by 75 basis points late March.

A basis point is 0.01 percentage point. Even though the benchmark yield dipped to 5.98%, it rebounded past 6.4% amid fiscal concerns.

Bond yields and prices are inversely correlated. The gauge dropped 20 basis points, the most since March 27, to 6.02%, after the Reserve Bank of India announced its latest instalment of Operation Twist. After the global financial crisis in 2008, when yields did not budge much despite increasing liquidity, the then Federal Reserve Chairman Ben Bernanke purchased bonds at the longer end, pushing yields down and raising rates in the near term.

This came to be termed ‘Operation Twist’. “The big difference here is that while it is buying dated government bonds ranging between 2026 and 2030 maturities, it is selling very short maturity treasury and cash management bills from its books,” said Suyash Choudhary, Head – Fixed Income, IDFC AMC. The RBI last used this tool in January.

It first used this measure in December, which helped ease yields by about 30 basis points from a five-month high of 6.80%, according to Bloomberg.

It had also introduced European Central Bank-like cash boost to banks. This article first appeared/also appeared in https://economictimes.indiatimes.com/markets/stocks/news/heres-what-you-should-know-about-rbis-operation-twist/articleshow/75327326.cms