Friday, April 3, 2015

Open Market Operations (OMO)


Open Market Operations (OMO)
If the central bank of a country, on behalf of the government, raises money from the open market by selling government securities, or inject money supply in the market by purchasing the government securities, then it will be known as Open Market Operations (OMO).

Note the term Open Market Operations: it simply means operations (selling/buying government securities) performed in the Open Market. OMO performs a major role in Monetary Policy.

In India, Reserve Bank of India (RBI), on behalf of Union government, performs this Open Market Operation.


Purpose of OMO

  • Adjust the liquidity condition in the market on a durable basis -
    a.  If there is excess liquidity in the market - RBI will sale the government securities, thereby sucking out the rupee liquidity
    b.  If the liquidity conditions are tight (i.e., less liquidity) - RBI will buy the government securities from the market, thereby releasing liquidity into the market
  • Government raises money from the market, when it needs money for governance purpose.


Government Securities
There are several government securities with different maturity dates, which are used for different purposes, as follows -
  • Treasury Bills (T-Bills)
  • Cash Management Bills (CMBs)
  • Dated Government Securities
  • State Development Loans (SDLs)
All these government securities are discussed in past article - Click here


Example
RBI on November 2014, announced to sell Rs. 12,000 crore government securities/bonds through Open Market Operations (OMO) to mop up liquidity from the market.

As part of the OMO, RBI would sell securities maturing in 2017 (bearing interest rate of 8.07 %), 2020 (7.8 %), 2022 (8.08 %) and 2027 (8.26 %).










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