• Open Market Operations refer to the purchase or sale of government securities by a central bank in the open market
• Primary objective is to regulate money supply and liquidity in the financial system
• In India, OMOs are a core monetary policy instrument used by the RBI
Role of OMO in India
• Used by the RBI to manage systemic liquidity in banks
• Helps in aligning short-term interest rates with the policy stance
• Acts as a tool for inflation management and financial stability
How Open Market Operations Work
• RBI purchases government securities • Injects liquidity into the banking system
• Increases banks’ lending capacity
• Leads to lower interest rates
• RBI sells government securities • Absorbs excess liquidity from the system
• Reduces money available for lending
• Results in higher interest rates
Key Objectives of OMO
Liquidity Management
• Ensures adequate availability of funds in the banking system
• Prevents both liquidity crunch and excess money supply
Inflation Control
• Sale of securities helps curb excess demand
• Rising interest rates reduce inflationary pressures
Growth Support
• During economic slowdown, RBI injects liquidity through OMOs
• Lower borrowing costs encourage investment and consumption
Interest Rate Transmission
• Strengthens the transmission of policy rates to market rates
• Helps maintain alignment between repo rate and market yields
Exchange Rate Stability
• Changes in domestic liquidity influence capital flows
• OMOs indirectly affect rupee stability during forex volatility
OMO and Government Securities Market
• OMOs involve Treasury Bills and Government Bonds
• RBI participation provides depth and confidence to the bond market
• Helps manage government borrowing costs without direct monetisation
OMO vs Other Liquidity Tools
• OMO provides long-term or durable liquidity
• Differs from repo and reverse repo, which are short-term tools
• Often used when liquidity needs are structural rather than transient
