OMO Auction and yield

Subject: Economy

Context:

Reserve Bank of India (RBI) gave a clear indication in the Open Market Operation (OMO) – Purchase and Sale – auction that it does not want Government Security (G-Sec) yields to go up.

Concept:

• Open market operation is the sale and purchase of government securities and treasury bills by RBI without printing new currency.
• Open market operation is a tool that the RBI uses to smoothen liquidity conditions through the year and regulate money supply in the economy.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.

Yield Curve:

• A yield curve is a graph of interest rate on all government bonds ranging from the short-term debt (one month) to long-term debt (could be high as 30 years).
• Typically, the short term bond has lower interest rate compared with the long-term bond reflecting the higher perceived risk of the latter. Hence a graph of the interest rate of the short-term bond and longer-term will be an increasing line chart. This in technical parlance is called an upward sloping curve.