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Open market operations (OMO)

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Open market operations (OMO):


Context:

The Reserve Bank of India (RBI) has said it would conduct Open Market Operation (OMO) purchase of State Developments Loans as per its October 9 announcement.

  • RBI will purchase the SDLs through a multi-security auction using the multiple price method. There is no security-wise notified amount.

What is OMO?

Open market operations is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.

The objective of OMO is to regulate the money supply in the economy.

  • It is one of the quantitative monetary policy tools.

How is it done?

RBI carries out the OMO through commercial banks and does not directly deal with the public.

OMOs vs liquidity:

  • When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity.
  • In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences short-term interest rates.

RBI employs two kinds of OMOs:

Outright Purchase (PEMO) – this is permanent and involves the outright selling or buying of government securities.

Repurchase Agreement (REPO) – this is short-term and are subject to repurchase.

InstaLinks:

Prelims Link:

  1. Monetary vs Fiscal policy tools.
  2. Quantitative vs Qualitative tools.
  3. What are OMOs?
  4. PEMO vs REPO.

Sources: the Hindu.