BAJAJ BROKING
June 02, 2025
5 mins read
Economic stability is one of the quintessential concerns for any country. With a stable economy, most things are possible. From defense to healthcare and infrastructure to advancements, everything requires a favourable economic condition. As a country, the duty of economic management is spread across multiple authorities. However, the primary in charge remains the central bank in most countries. In India, it is the RBI (Reserve Bank of India) that manages and balances the economic conditions in the country.
Inflation and liquidity are two essential aspects when it comes to balancing the economy of a country. During inflation, it becomes necessary to limit the purchasing power while liquidity is provided in favourable conditions. RBI uses several tools and techniques to balance the economy of India in the most suitable manner. One such tool is the OMO. Open Market Operations are a type of government strategy that aims to bring a favourable balance in the economy.
RBI can launch open market operations where it may buy or sell government securities to strike a monetary balance. So, what are open market operations? Read on as we answer all the questions related to the topic like the meaning and types of open market operations. It is essential to understand this tool not only for investors but also for anyone who is willing to learn the economics of India.
Open market operations, or OMO, is a practice used by the RBI or any central bank of a country. In this process, the Reserve Bank of India (or a central bank) goes out into the open market to buy or sell government securities. Now, you may wonder what is the purpose of this practice?
Simply put, the purpose of an open market operation is to achieve the desired monetary balance and policy in the country. The RBI may sell government securities when it wants to work on inflation. However, when there is a need to bring more liquidity to the market, it purchases government securities from one or more banks.
Here are the two scenarios that you must understand:
When the RBI sells government securities to banks, it aims to reduce the bank balance of commercial banks. When the banks purchase these securities, they lose their balance. As a result, now there is less liquidity and banks may not be able to offer more loans and credit to people.
In this way, the inflation may be controlled to some extent.
When the RBI realise that there is more liquidity need in the economy, it purchases government securities from banks. This way, it provides more cash to commercial banks that banks can use to grow their credit services.
In this way, the purchasing power of the money is enhanced and the economy receives more liquidity.
The Reserve Bank of India (RBI) employs Open Market Operations (OMOs) as a key monetary policy tool to regulate liquidity and control inflation in the economy. OMOs are primarily categorized into two types: Outright OMOs and Repos:
Outright OMOs are the outright buying or selling of government securities by the RBI in the open market.
When the RBI buys government securities, it adds liquidity to the banking system, thus expanding the money supply. However, when the RBI sells government securities, it withdraws liquidity from the banking system, thus contracting the money supply.
These transactions are carried out with no undertaking to reverse the deal, hence leaving a permanent effect on liquidity.
Repos (Repurchase Agreements) and Reverse Repos are short-term tools employed by the RBI to control short-term liquidity.
The RBI gives advances to commercial banks in a repo transaction by taking government securities with an undertaking to resell the same on a pre-specified date and price. This adds short-term liquidity to the system.
Under reverse repo operations, RBI sucks in liquidity by selling government securities to banks against an undertaking to buy them back later. It assists in wiping out excess liquidity.
These interest rates, in these transactions, are referred to as the repo rate and reverse repo rate, respectively. These operations are carried out by the RBI with different maturities like overnight, 7-day, and 14-day terms in order to regulate the liquidity position of the economy.
Open Market Operations (OMOs) are used by the Reserve Bank of India (RBI) to control liquidity and manage inflation in the economy.
The RBI either sells or purchases government securities in the open market.
When RBI purchases securities, it injects money into the banking system, increasing the money supply.
When RBI sells securities, it absorbs excess money, reducing the money supply and controlling inflation.
Purchasing securities leads to more funds with banks, encouraging them to lend more.
This reduces interest rates and boosts economic activity.
Selling securities reduces liquidity, which can raise interest rates and help contain inflation.
○ High Inflation: RBI sells securities to reduce money in circulation.
○ Economic Slowdown: RBI buys securities to inject liquidity and stimulate growth.
OMOs help the RBI regulate interest rates, control inflation, stabilize the currency, and ensure the smooth functioning of the financial system.
Open Market Operations (OMOs) are a crucial monetary policy tool used by the Reserve Bank of India (RBI) for managing liquidity and ensuring financial stability. The following points describe the contribution of OMOs to the Indian economy:
By buying and selling government securities, the RBI manages the supply of money in the banking system. Buying securities injects liquidity into the system and promotes lending and investment, while selling securities mops up surplus funds and keeps inflation in check.
Through the regulation of liquidity, OMOs affect short-term interest rates. Higher liquidity normally results in lower interest rates, which encourage borrowing and economic activity, while lower liquidity may result in higher rates, dampening inflationary pressures.
OMOs are a mechanism to control inflation. For example, in March 2020, RBI conducted OMOs to inject ₹1 lakh crore into the economy in an attempt to steady financial markets amidst the economic downturn due to the COVID-19 pandemic.
OMOs can help assist government borrowing by stabilizing the yield on bonds. By buying government securities, RBI can ensure favorable borrowing prices for the government.
Active OMO interventions reflect the RBI's willingness to ensure financial stability, thus increasing investor confidence in the economy.
OMOs indirectly stabilize the exchange rate by influencing interest rates and flows of capital, thereby helping to maintain stability in the Indian rupee.
Overall, OMOs represent an important vehicle for the RBI to handle liquidity, govern inflation, impact interest rates, and aid general economic stability in India.
To understand ‘what are open market operations’, let's have a look at an example.
A good example of the Reserve Bank of India's (RBI) Open Market Operations (OMO) was the one in March 2020, at the onset of the COVID-19 pandemic. In order to ease financial distress and provide proper liquidity in the banking system, the RBI notified the buying of government securities amounting to ₹30,000 crore in two tranches of ₹15,000 crore each. The initial auction took place on March 24, 2020, through the acquisition of several government securities, such as 6.84% GS 2022 and 7.72% GS 2025.
Open Market Operations are an important monetary policy instrument employed by central banks to manage liquidity in the financial system. Through the purchase of government securities, the RBI provides liquidity to the banking system, stimulating lending and investment. Selling securities, on the other hand, assists in absorbing excess liquidity, which helps to manage inflation. These operations are essential to ensure financial stability and that markets operate smoothly, particularly during times of economic instability.
The March 2020 OMO is indicative of the RBI's anticipatory strategy in managing liquidity and stabilizing financial markets in the face of unprecedented economic pressures.
OMO and quantitative easing differ primarily based on their scale, intent, and application within monetary policy frameworks. The table below will give you a quick insight into the striking differences between OMO and QE:
Feature | Open Market Operations (OMO) | Quantitative Easing (QE) |
Purpose | Routine tool to manage short-term liquidity and interest rates. | Unconventional tools used during economic crises or recessions. |
Scale | Small and frequent transactions. | Large-scale, long-term purchases. |
Type of Securities | Primarily short-term government securities. | Long-term government and sometimes private sector securities. |
Frequency | Regular and ongoing. | Occasional, during economic distress. |
Objective | Maintain day-to-day liquidity and target interest rate. | Stimulate the economy, lower long-term interest rates, and boost lending. |
Indian Example | RBI buying/selling G-Secs to manage liquidity daily. | RBI’s GSAP in 2021, purchasing ₹1 trillion in government securities. |
From the table above, it can be said that while both OMOs and QE involve the purchase of securities to influence liquidity, they are quite different in terms of their scale, application, and purpose within the spectrum of monetary policy.
Open Market Operations (OMOs) are a key tool of monetary policy used by the Reserve Bank of India (RBI) to manage liquidity and keep inflation in check. While important, OMOs have some limitations in the Indian context:
The success of OMOs relies on a healthy secondary market for government securities. In India, the secondary market is not very deep and liquid, which may hinder the smooth conduct of OMOs and restrict their role in liquidity management.
Excessive use of OMOs may impact the valuation of government securities held by banks. Extensive fluctuations in these securities' prices can pose risks to banks' balance sheets, which can lead to financial instability.
Sizeable OMOs can interfere with the government's borrowing scheme. For example, the widespread selling of securities by the RBI can result in a surplus in the market, which can hamper the government's capacity to raise funds at low rates.
Implementing OMOs involves careful timing and implementation. The RBI must carefully gauge the market environment in order to escape unintended consequences of excessive liquidity or tightening that will destabilize money markets.
OMOs mainly work through commercial banks and are not likely to have a direct impact on non-banking financial sectors' liquidity. This can minimize the overall efficiency of OMOs in promoting more general economic goals.
The success of OMOs relies upon the RBI to correctly predict the liquidity requirements. Misestimations may result in either excess liquidity, which encourages inflation, or shortages of liquidity, which constrains economic development.
In short, while OMOs are a crucial tool in the monetary policy arsenal of RBI, their efficiency is limited by market infrastructure, possible effects on financial institutions, and the complexity of implementing them. Overcoming these limitations necessitates the continuous growth of financial markets and improved coordination between monetary policy measures and fiscal activity
Open Market Operations (OMOs) are an important monetary policy instrument of the Reserve Bank of India in order to control liquidity, inflation, and financial stability. Through buying or selling government securities, the RBI affects money supply and interest rates. Yet, OMOs in India are constrained by issues such as a thin secondary market and implementation difficulties. Improving market infrastructure and coordination with fiscal policy can increase the efficacy of OMOs in India.
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OMO or open market operations are a practice of RBI and central banks of various countries that aim to achieve the desired monetary policy in the economy. In this, the RBI sells or buys government securities to bring a balance in the economy!
The interest rates in the economy is influenced by the OMO since the interest rates may fall when RBI sells securities and it may increase when RBI purchases securities.
OMOs are routine RBI operations to manage short-term liquidity, while QE is a crisis-driven, large-scale asset purchase to stimulate the economy by lowering long-term interest rates and boosting lending.
OMO are an essential tool that helps RBI control the liquidity and monetary value in the market. It is essential to keep inflation in check and maintain a favourable economic condition.
Yes. During inflation, RBI intends to sell government securities that limit the liquidity, thus, reducing inflation. On the other hand, when there is a need for liquidity in the market, RBI purchases government securities from commercial banks.
To maintain liquidity through OMO, RBI purchases government securities from commercial banks. This way, banks get more credit that they can use to issue loans and other credit facilities.
When it comes to controlling inflation, RBI aims to pull back certain funds from commercial banks so that the interest rate increases and the purchasing capacity gets limited for people. It is done in order to limit banks with their credit facilities. To control inflation, RBI sells government securities.
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