Context: Recently, RBI announced another ‘operation twist’, also known as open market operations (OMO), under which it conducts simultaneous sale and purchase of bonds.
Key Points

• Reserve Bank of India (RBI) has announced fresh Open Market Operations (OMO) for the sale and purchase of Government Securities.  
• The RBI will conduct the sale and purchase of government securities on July 2, 2020 of Rs 10,000 crore each. The RBI took the decision after considering the current liquidity and market situation. 
• In order to participate in the OMO, bidders and participants need to submit their bids on the E-Kuber system (Core Banking Solution) of the RBI in electronic format
• RBI has decided to conduct simultaneous purchase and sale of government securities under OMO for Rs 10,000 crore each.
• The RBI undertakes operation twist to manage yields in the bond market.
• Rationale behind the plan is to raise short-term yields and lower long term yields.

Open Market Operations (OMO)

• It is one of the Quantitative (to regulate or control the total volume of money) Monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
• OMOs are conducted by the RBI by way of sale or purchase of government securities to adjust money supply conditions.
• The central bank sells government securities to remove liquidity from the system and buys back government securities to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The RBI uses OMO along with other monetary policy tools such as repo rate, Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR) to adjust the quantum and price of money in the system.

Why RBI conducts the OMO?

The RBI conducts the OMO to manage the liquidity situation in the economy. Have a look at the motive behind the conduct of Open Market Operations:

• When there is excess liquidity --> Sale of Government Securities --> To drain liquidity off the market
• When there is Liquidity Crunch --> Purchase of Government Securities --> To infuse liquidity in the market

What are Government Securities?

• Government Securities are financial instruments or bonds - securities that are issued at face value by the Central Government for raising a loan from the public. The Government Securities are issued to finance important projects and manage budget deficits.

Operation Twist

• Operation Twist is when the central bank uses the proceeds from the sale of short-term securities to buy long-term government debt papers (Long term securities), leading to easing of interest rates on the long term papers.