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Open Market Operations

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  • 1. If one were to read articles in ET on monetary policy and macro- economic development, one often comes across a term called ‘OMO’.• So what is ‘OMO’?• While OMO is a famous detergent brand from Unilever, the ‘OMO’ we are talking about is something very different.
  • 2. First of all…• One must understand that when there is excess liquidity in the market, the RBI intervenes and sucks it by issuing bonds, among other means.• At the same time, if the liquidity starts to dry up in the markets, the RBI intervenes once again and infuses liquidity by buying back the bonds that are with the investors.
  • 3. What’s ‘OMO’ then?This interaction of the RBI with the marketis termed ‘OMO’ or ‘Open MarketOperations’.
  • 4. What is the outcome on account of OMO?• When the RBI buys bonds from the market and infuses liquidity, the consequences are: – It tends to soften the interest rates – Fresh bonds can be issued at lower yields and the government can thus borrow at a reasonable cost – It enables corporates to borrow at favorable interest rates – It prevents the rupee from strengthening unnecessarily and thereby protects the interest of exporters – It may tend to increase inflation
  • 5. When liquidity is more, the govt. can borrow at lower yields.RBI When the RBI wishes to Otherwise borrowing infuse liquidity into the will become expensive market, it buys back the bonds that are with the Govt. Borrowings investors Bn od s n t. Bo o v on t . Bn s od B ov d on t. s G B ov s d n t. ds G Bo o v s G d G Bn od s Bn od s p. or s p. C nd or s p. Bo C nd or ds p. Bo C n or ds C Bo n Bo When liquidity is good, interest rates are lower which helps corporates borrow at cheaper rates Corporates
  • 6. Consequently…If the RBI were to sell bonds instead and suck inliquidity, the effect would exactly be theopposite!!
  • 7. Thus……‘OMOs’ are an important instrument ofcredit control through which the ReserveBank of India purchases and sellssecurities.
  • 8. To Sum • What: Open Market Operations Up (OMOs) are the means of implementing monetary policy by which a central bank controls the nation’s money supply by buying and selling government securities, or other financial instruments. • Why: It helps regulate interest rates and foreign exchange rates.
  • 9. Hope you have now understood the concept of Open Market Operations Do write to me at professor@tataamc.com
  • 10. Disclaimer The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of futuremarket trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentationwill be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action. Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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