Prof. Anand S

Did you know that the RBI buys and sells securities in the market, as we do?

However, it trades only for specific purposes in line with its mandate to regulate the money supply and interest rates. The RBI is the government's debt manager. The government wants to borrow ₹12 lakh crores in the market. When so much money is borrowed, the price of money (Interest rate) will rise.RBI will intervene to create favourable conditions to support the government's borrowing programme.

What is OMO?

Open Market Operations, or OMOs, are the purchase and sale of Government Securities. Sometimes the RBI may simultaneously buy and sell securities. Read the /

What are government securities?

These are debt instruments issued by the government to borrow money. The two main categories are:

  1. Treasury Bills - Short-term instruments that mature in 91 days, 182 days, or 364 days
  2. Dated Securities - Long-term instruments that mature between 5 and 40 years

<aside> 💸 Government securities are promissory (conveying or implying a promise) notes with guaranteed payment at a zero-coupon rate and issued at a discounted rate.

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When the RBI wants to streamline money supply and interest rates, it conducts open market operations which are a monetary tool besides reserve ratio and policy rates. When it purchases bonds in the open market, it raises the price of bonds and reduces rates. As a result, there is an inverse relationship between bond prices and interest rates. Because it releases money through purchases, the money supply increases, making money less valuable, reducing interest rates and vice versa.

Principal Objectives of OMO

Control the supply of money or existing liquidity in the economy

  1. In an inflationary case, RBI sells government securities and sucks the excess cash from the system.
  2. In a recessionary case, RBI wants to boost money supply in the market and ensure adequate credit availability for investment and production.

The RBI conducts OMOs through commercial banks.

RBI announces Operation Twist worth ₹10,000 crore on 25 Feb