The economy is an integral part of the UPSC syllabus. Candidates should learn about the basics of the Indian economy and also develop an understanding of the important terms and concepts in economics for the IAS exam. In this article, you can read a brief about the Open Market Operations (OMO), meaning, concept, etc.
An Open Market Operation (OMO) is the buying and selling of government securities in the open market, hence the nomenclature. It is done by the central bank in a country (the RBI in India). When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity. In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences short-term interest rates. In India, after the economic reforms of 1991, the OMO has gained more importance than the CRR (cash reserve ratio) in adjusting liquidity.
Types of Open Market Operations
RBI employs two kinds of OMOs:
- Outright Purchase (PEMO) – this is permanent and involves the outright selling or buying of government securities.
- Repurchase Agreement (REPO) – this is short-term and are subject to repurchase.
Also, see:
| Securities and Exchange Board of India (SEBI) |
| Reserve Bank of India |
| India Post Payments Bank – RSTV: In-Depth |
Frequently Asked Questions related to Open Market Operations
Q1
What is open market operations by RBI?
Open Market Operations is the simultaneous sale and purchase of government securities and treasury bills by RBI. The objective of OMO is to regulate the money supply in the economy. RBI carries out the OMO through commercial banks and does not directly deal with the public.
Q2
How open market operations work?
The Federal Reserve buys and sells government securities to control the money supply and interest rates. This activity is called open market operations. To increase the money supply, the Fed will purchase bonds from banks, which injects money into the banking system. It will sell bonds to reduce the money supply.
Q3
Why is open market operations most used?
The use of open market operations as a monetary policy tool ultimately helps the Fed pursue its dual mandate—maximizing employment, promoting stable prices—by influencing the supply of reserves in the banking system, which leads to interest rate changes.
Q4
What is the difference between open market operations and quantitative easing?
Open market operations are a tool the Fed can use to influence rate changes in the debt market across specified securities and maturities. Quantitative easing is a holistic strategy that seeks to ease, or lower, borrowing rates to help stimulate growth in an economy.
Q5
What are the advantages of open market operations?
The major advantage of open market operations is that they inject money directly into the economy (or they extract money directly from it). When the Fed conducts open market operations, it wants to be able to have an impact on the money supply.
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