Open Market Operations (OMO)

Open Market Operations Latest News

The Reserve Bank of India (RBI) recently announced its plan to infuse Rs 1.9 lakh crore into the banking system through open market purchases of government securities and USD/INR swaps

About Open Market Operations

• OMOs refer to a central bank selling or purchasing securities in the open market.
• It is a monetary policy tool to rein in inflation and money supply in the system. 
• The Reserve Bank of India (RBI) uses OMOs in order to adjust the rupee liquidity conditions in the market on a durable basis. 
• When the RBI feels that there is excess liquidity in the market, it resorts to the sale of government securities, thereby sucking out the rupee liquidity. 
  • Selling securities removes money from the system, raises interest rates, makes loans more expensive, and decreases economic activity.
  • However, when liquidity is sucked out, it can lead to a spike in bond yields as the RBI will release more government securities into the market, and bond buyers demand more interest rate on these securities.
• Similarly, when the liquidity conditions are tight, the central bank buys securities from the market, thereby releasing liquidity into the market. 
  • Buying securities adds money to the system, lowers interest rates, makes loans easier to obtain, and increases economic activity.

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Open Market Operations FAQs

Q1. What are securities?

Ans. A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option.

Q2. What is a bond?

Ans. A bond is a type of debt security that represents a loan made by an investor to a borrower, typically a corporation, government, or other organization.

Q3. What is bond yield?

Ans. A bond’s yield is the return an investor expects to receive each year over its term to maturity.

Source: TOI