Open Market Operations: How RBI Uses OMO to Manage Liquidity
Why in the news
As bond yields rose, RBI asked states to reschedule market borrowings, and an OMO calendar was awaited in the 5 December review.
Key facts
- OMO: buying or selling government securities in the open market to regulate liquidity.
- Uses: curb inflation, support growth, steady bond yields and keep markets stable.
| Operation | RBI action | Liquidity | Rates | When |
|---|---|---|---|---|
| Purchase | Buys G-secs from banks | Rises | Fall | Slowdown or tight liquidity |
| Sale | Sells G-secs to banks | Falls | Rise | High inflation or excess liquidity |
Types
- Outright: permanent trades with long-term effect.
- Switch / Operation Twist: buy long bonds, sell short ones together, to manage the yield curve.
- Special: in extraordinary stress, such as the COVID period.
Exam angle
- Types: outright, OMO switch (Operation Twist), special OMOs.
- Remember: purchase means liquidity up, rates down.