OPEN MARKET OPERATIONS (OMO) (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     1st December 2023        
Samadhaan

Context: Recently, discussions on open market operations (OMO) auctions have paused among bond market participants due to the current tightness in banking system liquidity

  • Anticipation prevails that the system liquidity will remain in deficit mode, at least until mid-December.


Open Market Operations (OMO)

  • About: It is an activity by a central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks.
  • Regulate By: Reserve Bank of India
  • Participants in OMO: Scheduled Commercial Banks and Financial institutions
  • Purpose: Influence money supply, manage interest rates, and achieve monetary policy objectives.
  • Types of OMOs
  • Outright Purchase (PEMO) involves the permanent selling or buying of government securities.
  • Repurchase Agreement (REPO) is a short-term arrangement subject to repurchase.

OMOs vs Liquidity

  • When the central bank aims to inject liquidity into the monetary system, it purchases government securities in the open market, thereby supplying liquidity to commercial banks. 
  • Conversely, by selling securities, it restricts liquidity, enabling the central bank to indirectly regulate the money supply and impact short-term interest rates.

Importance of OMO

  • In India, the second half of the financial year typically witnesses tightening liquidity due to a slowdown in government expenditure and a seasonal increase in currency demand during the festival season.
  • Effective liquidity management is crucial to prevent cash shortages for banks and borrowers.
  • The central bank's indication of transitioning from a deficit stance to a 'natural' liquidity stance suggests potential increased liquidity in the system.
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