Previous Year Question

Open Market Operations (OMO) of the Reserve Bank of India (RBI) refer to the purchase and sale of Government Securities in the open market. It is an important instrument of the RBI's Monetary Policy through which liquidity in the banking system is regulated.

Purchase of Government Securities: When the RBI purchases Government Securities from the open market, the flow of money into the banking system increases. This increases liquidity and supports the lending capacity of banks.

Sale of Government Securities: When the RBI sells Government Securities in the open market, money flows from buyers to the RBI. This reduces liquidity in the banking system and helps control credit expansion.

OMO primarily involves transactions in eligible Government Securities issued by the Central and State Governments. It does not include foreign exchange auctions or gold transactions by the RBI. Intervention in the foreign exchange market and management of gold reserves are separate activities of the RBI.