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Open market operations

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

Open market operations:


Context:

RBI announces ₹20,000 crore open market operations on February 10.

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.

Mains Link:

What are OMOs? Discuss their significance.

Sources: the Hindu.