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Open Market Operations (OMO): meaning, types and effects
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Open market operations (OMO) are the RBI's outright purchase or sale of government securities in the market to change the amount of money in the banking system for a longer period. When the RBI buys securities, it pays banks in cash, and liquidity rises. When it sells them, cash flows back to the RBI and liquidity falls.
How OMO works
- OMO purchase: the RBI buys government securities from banks and other holders. This puts durable money into the system, which usually pulls yields down and makes credit cheaper.
- OMO sale: the RBI sells securities from its holdings. This soaks up money, pushes yields up and tightens credit.
OMOs are carried out through auctions or on the RBI's trading platform for government securities. They are one of the quantitative instruments, along with CRR, SLR and the repo rate.
OMO vs LAF
| Point | OMO | LAF |
|---|---|---|
| Nature | Outright sale or purchase | Repo or reverse repo (temporary) |
| Duration of effect | Durable or long-term | Short-term, mostly overnight |
| Purpose | Structural liquidity, yield management | Day-to-day liquidity |
Read the liquidity adjustment facility entry for the daily windows.
Related terms asked with OMO
- Operation Twist: the RBI buys long-dated securities and sells short-dated ones at the same time, to lower long-term yields without changing the total liquidity much. It was run in 2019 and 2020.
- Market Stabilisation Scheme (MSS): the government, at the RBI's request, issues securities to soak up excess liquidity (mostly from foreign inflows). The cash is held in a separate account.
- Sterilisation: using OMO or MSS to neutralise the effect of RBI's foreign exchange purchases on the money supply.
How bank exams ask about it
Common stems: "which is the instrument by which RBI buys and sells government securities", "the RBI buys securities, then money supply will", and "a quantitative credit control tool is". Expect OMO versus selective tools such as margin requirements. For the rest of the syllabus, see banking awareness.
Where to check
The RBI announces OMO auctions with a press release at rbi.org.in. Current-affairs questions often come from there.
Frequently asked questions
Does an OMO purchase increase or decrease the money supply?
It increases it, because the RBI pays out cash for the securities it buys.
Is OMO a selective or a general credit control?
General, because it affects credit across the whole economy and not a particular sector.
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- Liquidity adjustment facilityThe liquidity adjustment facility is the RBI's daily window for injecting or absorbing cash. Meaning, repo, SDF and MSF corridor, history and exam questions.
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