Open Market Operations (OMO)
1 Quick Explanation 1–3 min
OMO means the RBI buying or selling government securities in the open market.
Buying securities injects money; selling securities withdraws money.
2 Detailed Notes
Definition
Definition
Open Market Operations (OMO) refer to the buying and selling of government securities (G-secs) by the central bank in the open market to regulate money supply and liquidity.
Key idea
How it works
- RBI sells G-secs to banks → banks pay money → their reserves fall → less credit creation → money supply contracts.
- RBI buys G-secs from banks → banks get cash → reserves rise → more credit creation → money supply expands.
Example
When is OMO used?
In inflation, RBI sells securities to absorb excess money. In recession, RBI buys securities to inject liquidity and encourage lending.
Important
Limitations
OMO works only if there is a well-developed securities market. In underdeveloped markets, the RBI may rely more on CRR/SLR and repo.
In One Minute
OMO: RBI sells G-secs → money withdrawn; RBI buys G-secs → money injected. A market-based tool to regulate liquidity.
Important for Exam
- ⭐ 1-mark: define OMO.
- ⭐ 3-mark: buy/sell effect on money supply.
- ⭐ Link to monetary policy for inflation vs recession.
- ⭐ Distinguish OMO from CRR change (market-based vs quantity-based).
Watch & Learn
Watch on YouTubeMacroeconomics - Banking - Class 12 - chapter 6 - Part 1
by Rajat Arora
Why watch? Short and directly exam-relevant.
Open on YouTube Watch on YouTubeMacroeconomics - Banking - Class 12 - chapter 6 - Part 1
by Rajat Arora
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