Monetary Policy: Operation Twist
Monetary Policy is a macroeconomic policy, designed by the central bank of a country, RBI in India to manage money supply in an economy. It helps shaping variables such as inflation, consumption, savings, investment, capital formation etc. Operation twist is a newly added tool in the arsenal of monetary policy. To understand this let's first refresh the concept of bond yield through Mr. Jethalal and Ms. Babita's conversation. Babita: Hi Jethaji, I have a government security with face value of Rs 100 which gives me 10% per annum interest, and matures in a year but I am selling it as of now will you please purchase it from me? Jethalal: Yes sure, since you are selling I would purchase it for Rs 105. So, here a bond's face value is Rs 100, that is returned at the end of an year with an interest of Rs 10. Babita buys a bond at Rs 100 and if she keeps it till maturity she gets back Rs 110 while Jethalal buys the same bond at Rs 105 and if he keeps it till maturity he gets back