Open market operations (OMOs) - I

The liquidity conditions in the markets keep fluctuating depending on the demand and supply of currency in the markets. If the demand for Rupee is more than supply, then this shoots up the lending rates. This is because the borrowers want the money for business even at a higher rate. So, when all the borrowers borrow money at a rate higher than the usual, this drives up the cost of products or services which will in turn drive the inflation up.

There may be times when the supply of Rupee is more than the demand. This is a situation where the rupee is available easily and hence the banks will not charge higher rates of interest.

OMOs are the operations conducted by RBI in the open market which involves sale/purchase of Government securities to /from the market with an objective to adjust the rupee liquidity conditions in the market. When there is excess liquidity in the market, RBI resorts to sale of securities which will result in flow of money from the market to RBI (The banks and financial institutions buy these G secs by releasing cash from there system).

Similarly when the liquidity conditions in the market are tight, RBI purchases the G secs from the market which will result in flow of money from RBI into the system (The banks and financial institutions sell the G secs which they are holding and will receive cash from RBI).

Thus, RBI performs open market operations considering the targets for various economic parameters such as interest rates, exchange rates or inflation.