Why in the News?
The Reserve Bank of India announced a ₹1 trillion Open Market Operation purchase along with a 5 billion dollar rupee swap to inject durable liquidity into the banking system amid rupee weakness beyond 90 per dollar and foreign capital outflows.
What is an Open Market Operation Purchase
- An OMO purchase is when the RBI buys government securities from banks and financial institutions
- Objective is to inject durable and long term liquidity into the financial system
- Leads to an increase in bank reserves and eases short term interest rates
Purpose of OMO Purchases
- Inject durable liquidity into the banking system
- Improve monetary policy transmission so lending rates align with repo rate changes
- Stabilise money market rates such as the Weighted Average Call Rate
- Support financial stability during periods of currency and capital flow stress
Significance of the Recent OMO
- Offsets rupee liquidity drain caused by foreign portfolio outflows
- Supports monetary transmission during external sector stress
- Prevents sharp spikes in government bond yields
- Strengthens lending capacity of banks for businesses and households
Prelims Pointers
- OMO is a quantitative monetary policy tool
- OMO purchase injects liquidity while OMO sale absorbs liquidity
- Operation Twist reshapes the yield curve
- Durable liquidity differs from short term tools like repo and reverse repo
| [2013] In the context of Indian economy, ‘Open Market Operations’ refers to
(a) borrowing by scheduled banks from the RBI (b) lending by commercial banks to industry and trade (c) purchase and sale of government securities by the RBI (d) None of the above |
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