Context: Recently, Reserve Bank of India (RBI) has decided to infuse ₹10,000 crore liquidity in the banking system by buying government securities through open market operations (OMO).
What are OMOs?
- When the central bank buys and sells securities from other banks it is called as Open Market Operations. It serves as major tool to raise or
- Sells securities: When the bank wants interest rates to rise it sells securities.This is known as a contractionary monetary policy.
- It adds credit to the bank's reserves.
- Buys securities: And when the bank wants to lower interest rates it buys securities. Its purchase of securities is an example of an expansionary monetary policy.
Need of OMO in current scenario:
- To ensure that all market segments remain liquid and stable, and function normally.
- Due to heightened volatility in the financial markets due to the spread of the COVID-19.