Description

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Context:

The Reserve Bank of India (RBI) has announced plans to inject Rs 1.9 lakh crore into the banking system through open market operations (OMOs) and USD/INR swaps.

About Open Market Operations

It is a key tool used by central banks like the RBI to manage liquidity in the banking system.

Its operation involves the buying or selling of government securities in the open market to influence the amount of cash circulating in the banking system.

How do OMOs Work?

When the RBI wants to inject liquidity into the banking system, it purchases government securities from banks. This increases the cash reserves of banks, making more money available for lending and other financial activities.

When the RBI wants to reduce liquidity, it sells government securities to banks, which decreases the cash reserves of banks.

RBI's Recent Announcement

OMO purchase auctions of government securities worth Rs 1 lakh crore in two tranches of Rs 50,000 crore each, scheduled for March 12 and March 18
A USD/INR Buy/Sell Swap auction worth $10 billion with a 36-month tenor scheduled for March 24.

The banking system has faced liquidity challenges since December 2024, with liquidity moving from a surplus to a deficit. The liquidity deficit surged from Rs 65,000 crore in December 2024 to Rs 2.07 lakh crore in January 2025, before slightly improving to Rs 1.59 lakh crore in February 2025.

Must Read Articles:

ANNOUNCEMENT OF OPEN MARKET OPERATIONS (OMOS) BY RBI

RBI SALE AND PURCHASE OF 'OPEN MARKET OPERATIONS'

Source:

TIMES OF INDIA

PRACTICE QUESTION

Q. Consider the following statements about Open Market Operations (OMOs):

OMOs are conducted by commercial banks to manage their day-to-day liquidity requirements.
The Reserve Bank of India (RBI) uses OMOs as a key instrument of monetary policy to influence the money supply and interest rates in the economy.
OMOs exclusively involve the buying and selling of government securities in the secondary market.
A purchase of government securities by the RBI under OMOs leads to a decrease in the overall liquidity in the banking system.

How many of the above statements are correct?

A) Only one

B) Only two

C) Only three

D) All four

Answer: B

Explanation:

Statement 1 is incorrect: OMOs are conducted by central banks (like the RBI), not commercial banks. Commercial banks participate in OMOs by buying/selling securities, but they don't conduct the operations themselves.

Statement 2 is correct: The RBI uses OMOs to adjust rupee liquidity, influence money supply, and impact interest rates as part of its monetary policy toolkit.

Statement 3 is correct: OMOs involve the buying and selling of government securities in the open market, which also includes the secondary market.

Statement 4 is incorrect: When the RBI purchases government securities through OMOs, it injects liquidity into the banking system, which increases overall liquidity.

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