RBI conducts Rs 4175 cr outright OMO sales on Oct 16-20, shows data

RBI conducts Rs 4175 cr outright OMO sales on Oct 16-20, shows data

Subject: Economy

Section: Monetary Policy

Context: In October meeting, the monetary policy committee voted unanimously to keep interest rates unchanged. This was widely expected. But what was not was the RBI Governor stating that the central bank would consider open market operations in order to manage liquidity. This announcement drove the 10-year government bond yield up by 12 basis points to 7.34 per cent.

OMO:

• 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.
•  When the Reserve Bank feels that there is excess liquidity in the market, it resorts to the sale of government securities, thereby sucking out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, the central bank buys securities from the market, thereby releasing liquidity into the market. It’s used as a tool to rein in inflation and money supply in the system.
• 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.