Definition
Open Market Operations (OMO)
Open Market Operations are the RBI's purchases and sales of government securities in the market to manage liquidity and influence interest rates.
Through OMOs, the RBI buys G-secs to inject durable liquidity into the banking system or sells them to absorb excess liquidity. It is a key instrument for managing system liquidity around the policy rate and for smoothing the impact of large government market borrowing.
OMOs also indirectly affect bond yields: heavy RBI buying supports bond prices and caps yields, easing the government's borrowing cost. The RBI combines OMOs with tools like the repo and reverse repo to keep money-market rates near its policy intent.
Related terms
- Government Securities (G-Sec)Government securities are tradable debt instruments issued by the central or state governments, considered virtually free of credit risk in rupee terms.
- Bond Yield and Government BorrowingThe yield on government bonds reflects the cost at which the government borrows and is influenced by the size of its borrowing programme, inflation and RBI policy.
- Monetary Policy Committee (MPC)The Monetary Policy Committee is the RBI body that sets the policy interest rate to achieve the government-mandated inflation target.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.