Open Market Operations
Open market Operation refers to the purchase and sale of the Government securities by the Reserve bank of India from / to public on its account. But in India, as of now the market for government securities is not well developed, still OMO plays very important role. Here is how OMO works:
When RBI sells government security in the markets, the bank purchase them.
When the banks purchase Government securities, they have a reduced ability to lend to the industrial houses or other commercial sectors.
This reduced surplus cash, contracts the Credit supply.
When RBI purchases the securities, the commercial banks find them with more surplus cash and this would create more credit in the system.