open market operations
TRANSCRIPT
• So what is ‘OMO’?
• While OMO is a famous detergent brand from
Unilever, the ‘OMO’ we are talking about is
something very different.
If one were to read articles in ET on monetary policy and macro-
economic development, one often comes across a term
called ‘OMO’.
First of all…
• One must understand that when there is excess
liquidity in the market, the RBI intervenes and
sucks it by issuing bonds, among other means.
• At the same time, if the liquidity starts to dry up in
the markets, the RBI intervenes once again and
infuses liquidity by buying back the bonds that
are with the investors.
What’s ‘OMO’ then?
This interaction of the RBI with the market
is termed ‘OMO’ or ‘Open Market
Operations’.
What is the outcome on account of OMO?
• When the RBI buys bonds from the market and infuses liquidity, the consequences are:
– It tends to soften the interest rates
– Fresh bonds can be issued at lower yields and the government can thus borrow at a reasonable cost
– It enables corporates to borrow at favorable interest rates
– It prevents the rupee from strengthening unnecessarily and thereby protects the interest of exporters
– It may tend to increase inflation
RBI
When liquidity is more, the govt. can borrow at lower yields. Otherwise borrowing will become expensive
When liquidity is good, interest rates are lower which helps corporates borrow at cheaper rates
Govt. Borrowings
Corporates
Govt.
Bonds
Govt.
BondsGovt.
Bonds
Govt.
Bonds
Corp.
Bonds
Corp.
BondsCo
rp.
Bonds
Corp.
Bonds
When the RBI wishes to
infuse liquidity into the
market, it buys back the
bonds that are with the
investors
Bonds
Bonds
Bonds
Bonds
Consequently…
If the RBI were to sell bonds instead and suck in
liquidity, the effect would exactly be the
opposite!!
Thus……
‘OMOs’ are an important instrument of
credit control through which the Reserve
Bank of India purchases and sells
securities.
To Sum Up
• What: Open Market Operations
(OMOs) are the means of
implementing monetary policy by
which a central bank controls the
nation’s money supply by buying
and selling government securities,
or other financial instruments.
• Why: It helps regulate interest
rates and foreign exchange rates.
Hope you have now understood the concept ofOpen Market Operations
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