Open Market Operations
- 19 Mar 2020
- 3 min read
Why in News
Recently, the Reserve Bank of India (RBI) has decided to infuse Rs.10,000 crore liquidity in the banking system by buying government securities through Open Market Operations (OMO).
- The financial markets have been facing heightened volatility due to the spread of the COVID-19.
- RBI had earlier infused Rs. 25,000 crore of liquidity through Long-Term Repo Operations (LTRO).
- Open Market Operations (OMOs) are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
- If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
- Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
- It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
Long-term Repo Operations
- Under LTRO, RBI will conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1 lakh crore at the prevailing repo rate.
- As banks get long-term funds at lower rates, their cost of funds falls. In turn, they reduce interest rates for borrowers.
- LTRO helps RBI to ensure that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.
Objectives of LTRO
- To assure banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions.
- Further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.
- Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages.