Focus: GS-III Indian Economy
Why in news?
- The Reserve Bank of India (RBI) has advanced its liquidity infusion plan by purchasing government bonds following a review of ‘current liquidity and financial conditions’.
- The RBI had announced open market operations (OMOs) of ₹30,000 crore in March 2020 — the first tranche was scheduled for March 24 and the second tranche for March 30.
- On a review of current liquidity and financial conditions, the Reserve Bank has decided to advance the second tranche of purchase of government securities under OMOs for ₹15,000 crore to March 26, 2020.
- The RBI also said as a pre-emptive measure to tide over any frictional liquidity needs due to COVID-19, it had decided to conduct the variable rate repo auctions for ₹1,00,000 crore in two tranches.
Open market operations
- Open market operations is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
- The objective of OMO is to regulate the money supply in the economy.
- When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
- RBI carries out the OMO through commercial banks and does not directly deal with the public.
- OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.