Context:

The RBI had announced simultaneous purchase and sale of government securities under Open Market Operation (OMO) for an aggregate amount of Rs.20,000 crores in two tranches of Rs.10,000 crores each.

Open Market Operation

• Open market operations are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

Importance of OMO

• Smoothens the availability of money
• Liquidity management
• Alignment of monetary policy with fi scal policy.