While OMO is a famous detergent brand from Unilever, the ‘OMO’ we are talking about is something very different.
If one were to read articles in ET on monetary policy and macro-economic development, one often comes across a term called ‘OMO’.
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.
What’s ‘OMO’ then?
This interaction of the RBI with the market is termed ‘OMO’ or ‘Open Market Operations’.
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
When liquidity is more, the govt. can borrow at lower yields. Otherwise borrowing will become expensive When liquidity is good, interest rates are lower which helps corporates borrow at cheaper rates Govt. Borrowings Corporates When the RBI wishes to infuse liquidity into the market, it buys back the bonds that are with the investors G o v t . B o n d s G o v t . B o n d s G o v t . B o n d s G o v t . B o n d s C o r p . B o n d s C o r p . B o n d s C o r p . B o n d s C o r p . B o n d s B o n d s B o n d s B o n d s B o n d s
If the RBI were to sell bonds instead and suck in liquidity, the effect would exactly be the opposite!!
‘ OMOs’ are an important instrument of credit control through which the Reserve Bank of India purchases and sells securities.
What: Open Market Operations (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.