Daily Current Affairs : 10-October-2023

Open Market Operations (OMO) are vital tools employed by central banks worldwide, including the Reserve Bank of India, to regulate the money supply and manage liquidity in the financial system. This essay aims to delve into the nuances of OMO, its types, and the significant role it plays in the Indian economy.

Open Market Operations: An Overview

Open Market Operations involve the buying and selling of government securities in the open market. This process is entrusted to the central bank by the government and is instrumental in controlling the money supply. The primary goal is to regulate inflation and maintain a stable economic environment.

Types of Open Market Operations

a. Outright OMOs

  • Permanent injection/absorption of money into/from the system.
  • Central bank buys securities, injecting money, or sells them, withdrawing money.

b. Repurchase Agreement (Repo)

  • Central bank buys securities with a specified date and price agreement.
  • Repo rate, the lending interest rate, is determined for this transaction.

c. Reverse Repurchase Agreement (Reverse Repo)

  • Central bank sells securities with a specified repurchase agreement.
  • Reverse repo rate, the interest rate for withdrawal, is set for this transaction.
  • RBI conducts repo and reverse repo operations at various maturities, including overnight, 7-day, and 14-day periods.
Significance of Open Market Operations

a. Monetary Policy Tool

  • OMOs allow central banks to prevent inflation or deflation without direct market interference.
  • Central banks adjust borrowing costs instead of imposing regulations, enabling flexibility in monetary policy.

b. Promoting Economic Growth

  • During recessions, central banks lower borrowing costs, encouraging business activities and economic growth.
  • Lower interest rates facilitate business startups and hiring, leading to increased employment opportunities.
Role of OMO in the Reserve Bank of India
  • RBI employs OMOs as a vital tool for managing liquidity in the Indian financial system.
  • When excess liquidity is present, the sale of government securities reduces rupee liquidity, stabilizing the market.
  • During tight liquidity conditions, RBI purchases securities, injecting liquidity into the market, supporting economic activities.

Important Points:

  • Open Market Operations (OMO) Overview:
    • Buying and selling government securities in the open market.
    • Regulates money supply and manages liquidity in the financial system.
    • Goal: Control inflation and maintain economic stability.
  • Types of OMO:
    • Outright OMOs:
      • Permanent injection/absorption of money into/from the system.
      • Central bank buys/sells securities, influencing money supply.
    • Repurchase Agreement (Repo):
      • Central bank buys securities with specified date and price agreement.
      • Repo rate: Interest rate for lending in this transaction.
    • Reverse Repurchase Agreement (Reverse Repo):
      • Central bank sells securities with specified repurchase agreement.
      • Reverse repo rate: Interest rate for withdrawal in this transaction.
    • Various Maturities:
      • RBI conducts repo and reverse repo operations at different periods (e.g., overnight, 7-day, 14-day).
  • Significance of OMO:
    • Monetary Policy Tool:
      • Prevents inflation/deflation without market interference.
      • Adjusts borrowing costs instead of imposing regulations.
    • Promoting Economic Growth:
      • Lowers borrowing costs during recessions, encouraging economic activities.
      • Facilitates business startups and hiring, leading to increased employment.
  • Role of OMO in RBI:
    • Vital tool for managing liquidity in the Indian financial system.
    • Sale of government securities reduces excess liquidity, stabilizing the market.
    • Purchase of securities injects liquidity, supporting economic activities.
Why In News

The Reserve Bank of India announced its decision to consider the Open Market Operation (OMO) sale of government securities to manage liquidity in the system, aiming to stabilize the financial market and support economic growth amidst prevailing economic challenges.

MCQs about The Power of Open Market Operations in India

  1. What is the primary goal of Open Market Operations (OMO) conducted by central banks like the Reserve Bank of India?
    A. To regulate inflation and maintain economic stability.
    B. To increase government spending.
    C. To control exchange rates.
    D. To monitor stock market fluctuations.
    Correct Answer: A. To regulate inflation and maintain economic stability.
    Explanation: OMOs are employed by central banks to regulate the money supply, control inflation, and maintain economic stability by buying and selling government securities in the open market.
  2. What is the purpose of Repo and Reverse Repo operations conducted by the Reserve Bank of India?
    A. To increase government revenue.
    B. To regulate interest rates in the housing market.
    C. To manage liquidity and borrowing costs in the financial system.
    D. To control consumer spending.
    Correct Answer: C. To manage liquidity and borrowing costs in the financial system.
    Explanation: Repo and Reverse Repo operations are tools used by central banks to manage liquidity and borrowing costs in the financial system by buying and selling government securities.
  3. During recessions, how do central banks, including the Reserve Bank of India, utilize Open Market Operations?
    A. By raising borrowing costs.
    B. By lowering borrowing costs, encouraging business activities and economic growth.
    C. By implementing strict regulations on lending.
    D. By increasing taxes.
    Correct Answer: B. By lowering borrowing costs, encouraging business activities and economic growth.
    Explanation: Central banks lower borrowing costs during recessions to encourage business activities, promote economic growth, and increase employment opportunities.
  4. What is the significance of Open Market Operations in the context of monetary policy?
    A. They directly interfere in market activities.
    B. They promote hyperinflation.
    C. They allow central banks to control inflation without market interference and adjust borrowing costs.
    D. They solely focus on regulating stock prices.
    Correct Answer: C. They allow central banks to control inflation without market interference and adjust borrowing costs.
    Explanation: Open Market Operations enable central banks to control inflation without direct market interference by adjusting borrowing costs, ensuring economic stability.

Boost up your confidence by appearing our Weekly Current Affairs Multiple Choice Questions

Loading