RBI OMO Purchase of Rs 1 Trillion and Rupee Liquidity Support
Why in the news
With the rupee weaker than 90 per dollar after foreign outflows, RBI moved to put lasting rupee liquidity into the system.
Key facts
- Aim: steady liquidity, interest rates and currency markets.
- OMO purchase: bonds bought from banks and institutions, so reserves rise and short-term rates ease.
Types of OMO
| Type | RBI action | Effect |
|---|---|---|
| Expansionary | Buys securities | Reserves up, rates down, more lending |
| Contractionary | Sells securities | Money supply shrinks, rates rise, inflation eases |
| Operation Twist | Buys long bonds, sells short bonds | Yield curve shifts, total liquidity unchanged |
How it proceeds
- RBI reviews liquidity, capital flows and call rates.
- It announces an auction with amount and maturity.
- Banks sell bonds; RBI pays, so reserves expand.
- Overnight rates fall and yields soften.
Significance
- Refills rupee liquidity drained by outflows.
- Helps lending rates follow repo cuts.
- Prevents sudden bond-yield spikes, helping government borrowing.
- Lets banks lend more to firms and households.
Exam angle
- Purchase injects liquidity; sale absorbs it.
- Money-market rate named: Weighted Average Call Rate (WACR).