About Open Market Operations
- It is a monetary policy tool used by a central bank to control the money supply in an economy by buying or selling government securities in the open market.
- When a central bank wants to reduce inflation and money supply, it sells securities, and when it wants to stimulate the economy, it buys securities.
- The Reserve Bank of India (RBI) uses OMOs in order to adjust the rupee liquidity conditions in the market on a durable basis.
- When the RBI feels that there is excess liquidity in the market, it resorts to the sale of government securities, thereby sucking out the rupee
- Selling securities removes money from the system, raises interest rates, makes loans more expensive, and decreases economic activity.
- However, when liquidity is sucked out, it can lead to a spike in bond yields as the RBI will release more government securities into the market, and bond buyers demand more interest rate on these securities.
- Similarly, when the liquidity conditions are tight, the central bank buys securities from the market, thereby releasing liquidity into the market.
- Buying securities adds money to the system, lowers interest rates, makes loans easier to obtain, and increases economic activity.
