Open Market Operations (OMO)

07.03.2025

Open Market Operations (OMO)

Why in the news?                        

The Reserve Bank of India (RBI) recently announced its plan to infuse Rs 1.9 lakh crore into the banking system through open market purchases of government securities and USD/INR swaps.

About Open Market Operations:

• It is a monetary policy tool used by a central bank to control the money supply in an economy by buying or selling government securities in the open market.
• When a central bank wants to reduce inflation and money supply, it sells securities, and when it wants to stimulate the economy, it buys securities.
• The Reserve Bank of India (RBI) uses OMOs in order to adjust the rupee liquidity conditions in the market on a durable basis.
• When the RBI feels that there is excess liquidity in the market, it resorts to the sale of government securities, thereby sucking out the rupee
  • Selling securities removes money from the system, raises interest rates, makes loans more expensive, and decreases economic activity.
  • However, when liquidity is sucked out, it can lead to a spike in bond yields as the RBI will release more government securities into the market, and bond buyers demand more interest rate on these securities.
• Similarly, when the liquidity conditions are tight, the central bank buys securities from the market, thereby releasing liquidity into the market.
• Buying securities adds money to the system, lowers interest rates, makes loans easier to obtain, and increases economic activity.

                                                                Source: The Times of India

When the RBI buys securities in the market, what happens?

A.It raises interest rates and contracts the money supply.

B.It lowers interest rates and adds liquidity to the market.

C.It reduces the money supply and makes loans more expensive.

D.It lowers interest rates but does not affect liquidity.

Answer B