Key Terms & Concepts — UPSC Mains
Open Market Operations (OMO)
"RBI's tool of buying or selling government securities in the open market to regulate money supply and liquidity"
Open Market Operations (OMO) refer to the purchase and sale of government securities (G-secs) by the Reserve Bank of India (RBI) in the open market (primarily from banks and financial institutions). When RBI buys securities, it injects money into the banking system (expanding liquidity); when it sells securities, it absorbs money from the system (contracting liquidity). OMOs are an indirect monetary policy tool that operates through the bond market rather than through direct lending rates.
Core topic for GS3 (Economy, monetary policy). Questions on RBI's liquidity management tools are consistently asked in UPSC Prelims. OMOs need to be understood alongside repo rate, CRR, SLR, and MSF to explain how RBI controls money supply and interest rates in India.
- 1 When RBI buys G-secs (OMO Purchase) — injects liquidity — money supply increases — interest rates tend to fall — expansionary effect
- 2 When RBI sells G-secs (OMO Sale) — absorbs liquidity — money supply contracts — interest rates tend to rise — contractionary effect
- 3 OMOs affect long-term interest rates (yields on G-secs), while repo rate primarily affects short-term rates
- 4 Special OMO — Operation Twist — RBI simultaneously buys long-term bonds and sells short-term bonds to flatten the yield curve; used in 2019-20 to reduce borrowing costs for corporates
- 5 G-SAP (Government Securities Acquisition Programme) — announced in April 2021; a committed OMO schedule to support bond markets during COVID-19; RBI pre-announced purchase amounts to reduce uncertainty
- 6 OMOs do not change the policy rate (repo rate); they manage day-to-day and structural liquidity
- 7 Sterilised OMOs — RBI uses OMOs to offset the liquidity impact of foreign exchange interventions
- 8 Key difference from repo: Repo is temporary (overnight, with repurchase agreement); OMO is permanent (outright purchase/sale)
When the government's tax collections create a cash crunch in the banking system (advance tax payments by corporates), RBI conducts OMO purchases to inject liquidity, preventing a spike in short-term interest rates that would tighten credit conditions.