Open Market Operations (OMO) are monetary policy tools used by the Reserve Bank of India (RBI) to regulate the liquidity and money supply in the banking system. It involves the RBI buying and selling government securities in the open market. OMOs can influence interest rates in the economy. By affecting the money supply, OMOs can indirectly influence the cost of borrowing and lending.
- OMO refers to the buying and selling of government securities by the RBI in the open market.
- It aims to adjust the money supply in the economy and achieve the desired interest rate and inflation targets.
- OMOs are a flexible tool for the RBI to manage liquidity and influence interest rates.
- Buying government securities injects money into the system, while selling them absorbs liquidity.
- OMOs can be used to address both inflationary and recessionary pressures in the economy.
How OMOs Work?
- Controlling Liquidity:
- Excess Liquidity: When there is an excess supply of money in the banking system, the RBI conducts OMOs by selling government securities. Banks use their reserves to buy these securities, which reduces the money supply in circulation. This helps to control inflation.
- Tight Liquidity: Conversely, when there is a shortage of liquidity, the RBI conducts OMOs by buying government securities. This injects money into the banking system as banks receive payment for the securities they sell. This helps to stimulate economic growth.
Example of OMO
On March 23, 2020, in response to the economic concerns surrounding the COVID-19 pandemic, the RBI conducted a large-scale OMO by purchasing government securities, injecting ₹1 trillion into the economy. This aimed to improve liquidity conditions and support the financial markets. This injection of liquidity aimed to stabilize financial markets, ease liquidity constraints, and support economic activity during a period of heightened uncertainty.