1. If one were to read articles in ET
on monetary policy and macro-
economic development, one
often comes across a term
called ‘OMO’.
• So what is ‘OMO’?
• While OMO is a famous detergent brand from
Unilever, the ‘OMO’ we are talking about is
something very different.
2. First of all…
• One must understand that when there is excess
liquidity in the market, the RBI intervenes and
sucks it by issuing bonds, among other means.
• At the same time, if the liquidity starts to dry up in
the markets, the RBI intervenes once again and
infuses liquidity by buying back the bonds that
are with the investors.
3. What’s ‘OMO’ then?
This interaction of the RBI with the market
is termed ‘OMO’ or ‘Open Market
Operations’.
4. What is the outcome on
account of OMO?
• When the RBI buys bonds from the market and
infuses liquidity, the consequences are:
– It tends to soften the interest rates
– Fresh bonds can be issued at lower yields and
the government can thus borrow at a reasonable
cost
– It enables corporates to borrow at favorable
interest rates
– It prevents the rupee from strengthening
unnecessarily and thereby protects the interest of
exporters
– It may tend to increase inflation
5. When liquidity is
more, the govt. can
borrow at lower yields.
RBI When the RBI wishes to Otherwise borrowing
infuse liquidity into the will become
expensive
market, it buys back the
bonds that are with the
Govt. Borrowings
investors
Bn
od
s
n t.
Bo o v
on t .
Bn
s
od
B ov
d
on t.
s
G
B ov
s
d
n t.
ds
G
Bo o v
s
G
d
G
Bn
od
s
Bn
od
s
p.
or s p.
C nd or s p.
Bo C nd or ds p.
Bo
C n or ds
C
Bo n
Bo
When liquidity is good, interest rates are lower
which helps corporates borrow at cheaper rates Corporates
6. Consequently…
If the RBI were to sell bonds instead and suck in
liquidity, the effect would exactly be the
opposite!!
7. Thus……
‘OMOs’ are an important instrument of
credit control through which the Reserve
Bank of India purchases and sells
securities.
8. To Sum • What: Open Market Operations
Up
(OMOs) are the means of
implementing monetary policy by
which a central bank controls the
nation’s money supply by buying
and selling government securities,
or other financial instruments.
• Why: It helps regulate interest
rates and foreign exchange rates.
9. Hope you have now understood the concept of
Open Market Operations
Do write to me at
professor@tataamc.com
10. Disclaimer
The views expressed in these lessons are for information
purposes only and do not construe to be of any investment,
legal or taxation advice. They are not indicative of future
market trends, nor is Tata Asset Management Ltd. attempting
to predict the same. Reprinting any part of this presentation
will be at your own risk and Tata Asset Management Ltd. will
not be liable for the consequences of any such action.
Mutual Fund investments are subject to market risks, read all scheme
related documents carefully
