From UPSC perspective, the following things are important :
Prelims level : Open Market Operations (OMO)
Mains level : NA
The Reserve Bank of India (RBI) has decided to halt its bond-buying under the G-Sec Acquisition Programme (GSAP).
Why such move?
- The GSAP had succeeded in ensuring adequate liquidity and stabilising financial markets.
- Coupled with other liquidity measures, it facilitated congenial and orderly financing conditions and a conducive environment for the recovery.
What is GSAP?
- The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured Open Market Operation (OMO), of a much larger scale and size.
- G-SAP is an OMO with a ‘distinct character’.
- The word ‘unconditional’ here connotes that RBI has committed upfront that it will buy G-Secs irrespective of the market sentiment.
What are Government Securities?
- These are debt instruments issued by the government to borrow money.
- The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.
- Like bank fixed deposits, g-secs are not tax-free.
- They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
- However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
- Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- The RBI, however, remained ready to undertake G-SAP as and when warranted by liquidity conditions.
- It would also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs).
Answer this PYQ in the comment box:
Q.Consider the following statements:
- The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
- Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3
Post your answers here:
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Back2Basics: Open Market Operations (OMO)
- OMOs is one of the quantitative monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
- It is a part of the Market Stabilization Scheme (MSS) by the RBI.
- OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
- The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.
D 1,2and 3