'OMOs, Operation Twist potent tools in central bank's arsenal'

Mumbai: Citing near-total success with the many unconventional monetary policy tools it has deployed to insulate the economy from the ravaging impacts of the pandemic since last February, an RBI paper has said going ahead too, outright OMOs along with Operation Twists will continue to be potent tools in the central bank's arsenal.

The March issue of the RBI bulletin released on Friday said the success of OTs (Operation Twists) combined with liquidity injection through outright OMOs (open market operations) have moderated the yields on government securities and has reduced the cost of borrowing for the government.

Simultaneous purchase and sale of government securities under OMOs is popularly known as Operation Twist. It involves buying long-end debt while selling short-tenor bonds to keep borrowing costs down.

"Overall, the proactive measures undertaken by the RBI during the pandemic have laid the foundations for economic recovery to gain momentum, going ahead.

"Overall, these measures have had a sobering impact on yields and risk spreads, which have helped in easing market stress and softening financing conditions," the paper by RBI house economists said.

The several unconventional monetary policy tools deployed by the monetary authority in the wake of the pandemic include the 115 basis points (bps) repo rate cuts in two installments, 100 bps CRR reduction at one go and many unconventional

measures.

These include extended lending or term-funding operations including liquidity support through refinance; asset purchase programmes including Operation Twists; and the forward guidance to assure the market that the RBI will stand by with them and do whatever it takes to put out the fire.

Liquidity support operations included extended lending/term-funding through long term repo operations (LTROs) in February 2020 to facilitate monetary policy transmission and support credit offtake.

Under the scheme, the Reserve Bank provided long-term liquidity to banks at the erstwhile policy repo rate (5.15 per cent), lower than the prevailing market rates and banks' own deposit cost to lower their cost of funds. During February-March 2020, five LTROs of Rs 25,000 crore each with one of 1-year tenor and four of 3-year tenors were conducted, which augmented system liquidity by Rs 1,25,117 crore, the paper said.