From UPSC perspective, the following things are important :
Prelims level : Various instruments of OMOs, OMOs
Mains level : Read the attached story
The Reserve Bank of India (RBI) has decided to infuse ₹10,000 crore liquidity in the banking system by buying government securities through open market operations (OMO).
What are Open Market Operations (OMOs)?
- OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
- 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.
How and in what form can government securities be held?
- The public debt office (PDO) of RBI, acts as the registry and central depository for G-Secs.
- They may be held by investors either as physical stock or in dematerialized (demat/electronic) form.
- It is mandatory for all the RBI regulated entities to hold and transact in G-Secs only in dematerialized subsidiary general ledger or SGL form.
i) Physical form
- G-Secs may be held in the form of stock certificates. A stock certificate is registered in the books of PDO.
- Ownership in stock certificates cannot be transferred by way of endorsement and delivery.
- They are transferred by executing a transfer form as the ownership and transfer details are recorded in the books of PDO.
- The transfer of a stock certificate is final and valid only when the same is registered in the books of PDO.
ii) Demat form:
- Holding G-Secs in the electronic or scripless form is the safest and the most convenient alternative as it eliminates the problems relating to their custody, viz., loss of security.
- Besides, transfers and servicing of securities in electronic form is hassle free.
How are the G-Secs issued?
- G-Secs are issued through auctions conducted by the RBI.
- Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI.
- The RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar which contains information about the amount of borrowing, the range of the tenor of securities and the period during which auctions will be held.
- The RBI conducts auctions usually every Wednesday to issue T-bills (Treasury Bills) of 91-day, 182-day and 364-day tenors.
- Settlement for the T-bills auctioned is made on T+1 day i.e. on a working day following the trading day. Like T-bills, CMBs are also issued at a discount and redeemed at face value on maturity.
- The tenor, notified amount and date of issue of the CMBs depend upon the temporary cash requirement of the Government. The tenors of CMBs are generally less than 91 days.
What is meant by repurchase (buyback) of G-Secs?
- Repurchase (buyback) of G-Secs is a process whereby the central government and state governments buy back their existing securities, by redeeming them prematurely, from the holders.
- The objectives of buyback can be the reduction of cost (by buying back high coupon securities), reduction in the number of outstanding securities and improving liquidity in the G-Secs market (by buying back illiquid securities) and infusion of liquidity in the system.
- The repurchase is also undertaken for effective cash management by utilising the surplus cash balances.
- The state governments can also buy back their high coupon (high-cost debt) bearing securities to reduce their interest outflows in the times when interest rates show a falling trend.
- States can also retire their high-cost debt pre-maturely in order to fulfil some of the conditions put by international lenders like Asian Development Bank, World Bank etc. to grant them low-cost loans.