Open market operations (OMO)
- Posted By
10Pointer
- Categories
Economy
- Published
19th Oct, 2020
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- The Reserve Bank of India (RBI) has said it would conduct Open Market Operation (OMO) purchase of State Developments Loans (SDLs).
- RBI will purchase the SDLs through a multi-security auction using the multiple price method.
- There is no security-wise notified amount.
- 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.
- RBI carries out the OMO through commercial banks and does not directly deal with the public.
- 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) – These are short-term and are subject to repurchase.
