Open market operations (OMO)

The Reserve Bank of India (RBI) has said it would conduct Open Market Operation (OMO) purchase of State Developments Loans (SDLs).

• 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:
  1. Outright Purchase (PEMO)– this is permanent and involves the outright selling or buying of government securities.
  2. Repurchase Agreement (REPO) – These are short-term and are subject to repurchase.