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| Open Market Operations |
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- If one were to read articles in ET on monetary policy
and macroeconomic development, one often comes
across a term called 'OMO'.
- So what is 'OMO'? While OMO is a famous
detergent brand from Unilever, the 'OMO' we are
talking about is something very different.
- 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.
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- 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.
- 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 favourable
interest rates
– It prevents the rupee from strengthening
unnecessarily and thereby protects the interest of
exporters
– It may tend to increase inflation
- 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.
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Hope this story succeeded in clarifying the concept of OMO
Please give us your feedback at
professor@tataamc.com
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