Open Market Operations by RBI

Open Market Operations (OMO) is a monetary policy tool used by the Reserve Bank of India (RBI) to regulate the money supply in the economy. It involves the buying and selling of government securities in the open market to influence the liquidity in the banking system.

Government Securities

Government securities (G-Secs) are debt instruments issued by the government to finance its budget deficit. These securities have a fixed rate of interest and a fixed maturity period. The RBI uses G-Secs as a tool for liquidity management through OMO.

Purchase of Government Securities

When the RBI purchases government securities through OMO, it injects liquidity into the banking system. This means that banks have more money to lend and interest rates decrease. Lower interest rates encourage borrowing and investments, which in turn stimulate economic growth.

Sale of Government Securities

When the RBI sells government securities, it absorbs liquidity from the banking system. This means that banks have less money to lend and interest rates increase. Higher interest rates discourage borrowing and investments, which can help to control inflation.

Foreign Exchange and Gold

The RBI also intervenes in the foreign exchange market through OMO by buying and selling foreign currency. However, it does not use OMO to purchase or sell gold.

Conclusion

In conclusion, the RBI uses open market operations primarily to purchase and sell government securities in order to regulate the liquidity in the banking system. While it may also intervene in the foreign exchange market, it does not use OMO to deal with gold transactions.

Since, central bank of any country, that is Reserve Bank of India (RBI), in India is known as government's bank. To regulate the supply of cash in market the apex bank sale or purchase the government securities according to the requirement. When the supply of cash in market will increase, government will sell the government securities in open market by which the cash from the market will come to central bank and the supply and demand of cash will be in equilibrium and vice versa.