Why in news
- Reserve Bank of India planned Open Market Operation (OMO) bond sales to absorb around Rs 1 trillion in persistent banking surplus liquidity.
Key terms
Open Market Operations (OMO)
Sale or purchase of government securities by a central bank to control money supply.
Forex Swap
An agreement where the central bank buys or sells foreign currency against local currency with a promise to reverse the transaction at a future date.
What are Open Market Operations?
- Quantitative monetary policy tool used by the RBI to regulate liquidity by buying or selling government securities (G-Secs) in the open market.
- Selling G-Secs absorbs excess liquidity from banks, while purchasing G-Secs injects liquidity into the financial system.
Drivers of current liquidity surplus
- Surplus banking liquidity surged primarily due to the unwinding of RBI's foreign exchange swap operations.
- OMO bond sales realign the Weighted Average Call Rate (WACR) with the repo rate by pulling cash out of the banking system.
Prelims facts
- OMO bond sales reduce bank liquidity and tighten short-term interest rates.
Mains discussion
- Interplay between foreign exchange intervention and domestic monetary liquidity management.
Source: Business Standard
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