Context:
The Reserve Bank of India (RBI) has advised state governments to reschedule market borrowings to ease supply pressure in the bond market amid rising yields. This guidance comes ahead of expectations that RBI will announce an Open Market Operations (OMO) calendar in its December 5 policy review.
Open Market Operations (OMO)
Open Market Operations (OMOs) are monetary policy tools used by the Reserve Bank of India (RBI) to regulate liquidity (money supply) in the financial system through buying or selling government securities (G-secs) in the open market.
Why RBI Uses OMOs
- Control Inflation – By reducing excess liquidity.
- Support Growth – By injecting liquidity when markets face a shortage.
- Manage Bond Yields – To ensure stable borrowing costs for the government.
- Maintain Financial Stability – Prevent market volatility and liquidity stress.
How OMOs Work
1. OMO Purchase (Liquidity Injection)
RBI buys government securities from banks.
- Money flows into the banking system
- Liquidity increases
- Interest rates fall
- Useful during economic slowdown or when liquidity is tight
2. OMO Sale (Liquidity Absorption)
RBI sells government securities to banks.
- Money flows out of the banking system
- Liquidity decreases
- Interest rates rise
- Used when inflation is high or liquidity is excessive
Types of OMOs
- Outright OMOs
- Permanent purchase/sale of G-Secs.
- Long-term impact on liquidity.
- OMO Switch/Operation Twist
- RBI buys long-term bonds and sells short-term bonds simultaneously.
- Used to manage the yield curve.
- Special OMOs
- Conducted during extraordinary market stress (e.g., COVID period).
