Open Market Operations or OMO refers to one of the activities undertaken by the Reserve Bank of India to control the amount of liquidity in the economy. Open Market Operations consists of the sale/purchase of Government Securities to/from the market by the Reserve Bank of India with an objective to control the amount of liquidity in the economic system.
How does the Open Market Operations Work?
The concept behind the Open Market Operations is simple. When the Reserve Bank of India perceives inflationary pressures in the economy, it resorts to selling of Government Securities (considered to be the safest form of investment). This helps to curb excess liquidity from the economic system.
As buyers lap up the sale of securities with money parked with the banks, the ability of banks to create credit gets restricted and liquidity gets curbed.
Again when the RBI perceives the need to expand credit in the economy (often to counter deflationary situations), it resorts to the buy back of Government Securities which releases a huge amount of funds locked with the Reserve Bank and gives credit creation a boost.
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