What is the objective of RBI’s new 20000 cr-special OMO?

Published: August 27, 2020

In a recent announcement, the Reserve Bank of India declared its intention to conduct simultaneous purchase and sale activities of government securities under the Open Market Operations for an amount of Rs 20,000 crore in two channels.

Open Market Operation (OMO)

An open market operation is an activity of the central bank that is associated with giving or taking liquidity in its currency to the banks or from the banks. The central bank, (generally the Reserve Bank of India In the case of India) can either buy or sell government bonds in the open market.

RBI decided to buy government securities including

  • 18% maturing on 4th November 2024.
  • 24% maturing on 15th February 2027.
  • 79% maturing on 11th May 2030.
  • 95%maturing on 28th August 2032.

Objectives

The aim of the purchase and sale operation of government securities by the RBI includes purchasing government securities of longer maturities and selling the same amounts of securities of shorter maturities. It could help the economy in the following way.

  • OMO help to regulate the money supply in the economy.
  • Purchasing government securities injects the money supply in the economy.
  • Selling government securities flows out liquidity from the system.
  • RBI conducts the Open Market Operations through commercial banks.

OMO reduces the impact of liquidity on the interest rate and inflation rate.

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