Why in News?
Amid tightening liquidity conditions, the RBI announced OMO purchases of ₹1,00,000 crores in Government Securities (G-Secs) to inject durable liquidity into the banking system.
Description:
What is OMO?
- Open Market Operation (OMO) is the sale and purchase of government securities in the open market by the Reserve Bank of India (RBI).
Why OMO Purchases Now?
- High government cash balances (Govt having more money) → reduced liquidity in banks.
- RBI’s forex operations → drained rupee liquidity.
- Festival-season and year-end credit cycles increased bank lending, tightening systemic liquidity. Reduces the cash reserves banks hold with RBI and in the interbank market.
- Overnight rates rose above the repo rate, signalling persistent liquidity stress.
OMO Purchase and its impact on the Economy:
1. Improves credit flow.
2. Bond Market: RBI buying G-Secs increases demand → yields soften.
3. Monetary Transmission: Better liquidity → Borrowing costs for govt. and corporates may decline.
4. Currency Stability: OMO + Foreign Exchange swap combination avoids rupee over-depreciation.
Why Not OMO Sales?
- OMO purchases = liquidity injection.
- OMO sales = liquidity absorption.
Given tight liquidity, the RBI chose purchase-side OMOs.
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