Open Market Operations(OMO)

▪️ It is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country. 

▪️ Aim: To adjust the rupee liquidity conditions in the market on a durable basis. 

▪️ The central bank carries out the OMO through commercial banks and does not directly deal with the public. 

▪️When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.  

▪️ Similarly, when the liquidity conditions are tight, RBI may buy securities from the market thereby releasing liquidity into the market. 

 

✅ Open Market Operation (OMO) means buying and selling of government securities in the open market by the central bank of a country (RBI in India).

 •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.

2 Types of Open Market Operations by RBI

1. Outright Purchase (PEMO) – this is permanent and involves the outright selling or buying of government securities.

2.Repurchase Agreement (REPO) – this is short-term and are subject to repurchase.