In trying to flatten the yield curve by driving up short-term rates, the RBI can end up hurting corporate borrowers and NBFCs who tap the markets for 1- to 5-year money for their working capital needs
Taking a leaf out of the US Federal Reserve’s playbook, the Reserve Bank of India on Monday experimented with an unconventional policy tool to coerce the yield curve to do its bidding. It put through open market operations that entailed buying 10-year government bonds worth ₹10,000 crore while auctioning off up to one-year treasuries of the same value. In the short run, ‘Operation Twist’ has certainly helped the RBI achieve its objective. Since the RBI’s announcement last week, the yield on the benchmark 10-year government security has dipped from a high of 6.8 per cent on December 16 to 6.57 per cent. One hopes though, that the success of this edition of Operation Twist doesn’t prompt the RBI to resort to such interventionist measures too often in future.