Concept: Open Market Operation (OMO)
Category: Monetary Policy
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Economy is an integral part of the UPSC syllabus. Candidates should learn about the basics of the Indian economy and also develop an understanding of the important terms and concepts in economics for the IAS exam. In this article, you can read a brief about the Open Market Operations (OMO), meaning, concept, etc.
An Open Market Operation (OMO) is the buying and selling of government securities in the open market, hence the nomenclature. It is done by the central bank in a country (the RBI in India). When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity. In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences the short-term interest rates. In India, after the economic reforms of 1991, the OMO has gained more importance than the CRR (cash reserve ratio) in adjusting liquidity.
Types of Open Market Operations
RBI employs two kinds of OMOs:
- Outright Purchase (PEMO) – this is permanent and involves the outright selling or buying of government securities.
- Repurchase Agreement (REPO) – this is short-term and are subject to repurchase.