Open Market Operations

Context:

• The Reserve Bank of India has recently decided to conduct purchase of Government securities under Open Market Operations.

What are Open Market Operations?

• Open market operations (OMO) refer to the buying and selling of government securities in the open market by the Central Bank (RBI).

Purpose:

• Open Market Operations allow RBI to adjust money supply conditions in the economy.
• OMO helps to manipulate the short-term interest rate and the supply of base money in an economy.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.

How does it work?

• RBI buying securities in the open market >> Banks would have surplus cash >> Greater supply of money and liquidity in the economy >> Can lead to inflation.
• RBI selling securities >> Banks would have less cash >> Lower volume of money with the public and lower liquidity. This helps bring down inflation.

Prelims Question

Which of the following policy options would increase interest rates?
1.The RBI sells bonds through open market operations.
2.RBI increases Repo rates.
Select the correct answer using the code given below.
(a)1 only
(b)2 only
(c)Both 1 and 2 
(d)Neither 1 nor 2

Answer to the Prelims Question