View: Operation Twist worked where rate cuts failed

By Ranjan Chakravarty

The Reserve Bank of India’s Operation Twist has ensured that this year ends on a positive note. The much needed open market operations (OMOs), with an essential structural component of liquidity provision, have the potential to act at best as a superior alternative, and at worst as a strong adjunct, to the largely blunt policy instrument of tightening and easing, which has heretofore been the norm.

Moreover, this combination of policy actions will provide a much needed continuity to the monetary policy process, and will go a long way towards achieving yield stability and rational pricing, which has evaded benchmark maturities on the yield curve for most of this year.


The 30-year yield began 2019 at 7.63 per cent and lost around 100 basis points by mid-July. It can be argued that it faithfully followed the rate cuts at the short end. However, from August right into the last quarter, and it reached 7.37 per cent on December 16, with no rate hikes except the implicit rate hike in December 5 MPC meet, when the RBI did not change rates after the market had priced in a 25 basis point easing.

Similarly, the 10-year bond yield began at 7.35 per cent and followed the 30-year to lose 100 basis points by mid- July. Clearly the cuts at the short-end were carried into this benchmark maturity almost directly, and from August onwards, the 5-year yield was volatile, but trended upward with a December 16 value of 6.77 per cent.

The behaviour of both the yields post July was in line with the urgent call for drastic rate slashes that experts have been calling for. In the absence of decisive easing actions, the yield would have moved upwards and this is what exactly happened from August to December.

Operation Twist should go far in allaying this issue and we are very optimistic that yields will rationalise in the first quarter of 2020. Our prognostications and exhortations to RBI for rate slashes were a big miss, but above is evidence that had our beseeching been heeded, yields and financing rates, and hence expansionary growth would have benefited.

On the forex side, the rupee has been faithful to its link to Brent crude and has stayed rangebound below 72. We are confident of continued rangebound behaviour from the rupee going forward, but will be watching its movement.

Since equity market lies in between policy rates and forex, we saw no cause for worry on this score, and do not see any going forward. On a net basis, with the commencement of Operation Twist, we expect a cooling down to equilibrium in rates, and a continuation of the brent-linked stability in the rupee.

Overall, this portends a stable, positive and upwardly moving market going forward, with a very likely pickup in real growth rates by mid-2020.

(Ranjan Chakravarty, Economist and Product Strategist at Metropolitan Stock Exchange. Investors are advised to consult financial advisers before taking an investment calls based on these observations)