What are the Open Market Operations (OMOs)

An open market operation (popularly also known as OMO) is an activity by a central bank to buy or sell government securities  on the open market.  Central banks use these operations as the primary means of implementing monetary policy.

Thus we can say that in India OMOs are the market operations conducted by the Reserve Bank of India (it is central bank of India) 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

1. Sale of Government Securities :

When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. It is simple operation, wherein RBI sells the government securities to banks, who pay for these investments.  Thus excess liquidity goes to RBI.

Purchase or  BuyBack of Government Securities :

When RBI feels that the liquidity conditions are tight, it will purchase  / buy back  securities from the market, thereby releasing liquidity into the market.  Under this operation, RBI purchases government securities from banks and thus pays the bank equivalent amount to banks.  Thus, liquidity is injected into the system.

Collateralised Borrowing and Lending Obligation (CBLO)

This is another money market instrument used in India.  This is  operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money market or have restricted access in terms of ceiling on call borrowing and lending transactions.

CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days (up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain Current account with RBI.

Repo market

Repo : We have seen above LAF and now that it is conducted through Repos and Reverse Repos.  The Repo is also known as ready forward contact, and is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed. Thus under Repo, banks borrow from RBI and thus liquidity comes to banking system.

Reverse Repo : The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.   Thus, under Revere Repo banks lend money to RBI and thus liquidity reduces in the banking system.