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Open Market Operations

What is OMO?
Open Market Operation (OMO) is buying or selling of government
securities conducted by RBI to manage the liquidity conditions in the market and
may support government market borrowing.
Its one of the major instruments of monetary policy by which the RBI
infuses liquidity in the market and can be used in sterilization of capital flows
(managing excess inflow of capital).
Effective instruments for OMOs are Liquidity Adjustment Facility (LAF) to
manage liquidity and Market Stabilization Scheme (MSS) to manage long term
excess liquidity.
Two rates constitute the LAF system, Repo and Reverse Repo rate.
Repo rate is used for daily injection of liquidity and reverse repo is used for daily
absorption of securities.
Securities purchased and sold in OMOs are dated securities, T bills.
Presently because of the liquidity deficit RBI is resorting to purchasing
bonds from the market.
How is it conducted?
When there is excess liquidity in the market, RBI sells bonds to absorb
liquidity and when there is liquidity deficit, it buys bonds to inject liquidity in the
RBI could support government borrowing through OMOs by injecting
liquidity in the market by buying back bonds from banks. This in turn could lower
Gsec yields because of improved liquidity.

Buys Bonds
from Banks
Banks buy Gsec

What are OMO effects on the market?
When RBI buys back bonds the effects are:
Increases liquidity.
Could lower Gsec yields
Tends to reduce interest rates.
It may tend to be inflationary.
When RBI sells bonds and absorbs liquidity, the effects are reversed.
RBI for FY12 has conducted 5 OMO purchases for total amount of ` 60,000cr out of which `
54,573 cr has been accepted. Table below shows the OMO purchases accepted in various
dated securities on date it was conducted.
Dated Security 11-May-12 18-May-12 25-May-12 12-Jun-12 22-Jun-12 Grand Total
8.24% GS 2018 2763 1869 4632
8.19% GS 2020 4792 4384 4555 13731
8.79% GS 2021 6284 5653 5845 17782
8.08% GS 2022 0 993 993
7.35% GS 2024 5 5
9.15% GS 2024 4497 4979 9477
8.26% GS 2027 2081 28 2109
8.97% GS 2030 468 1803 3403 5674
8.28% GS 2032 0 171 171
Grand Total 9757 11128 11194 11207 11287 54573
(In ` cr) Source: RBI
Government Borrowing Program (` crore)
Budgeted G-Sec Gross Borrowings for 2012-13 569616
Budgeted G-Sec Net Borrowings for 2012-13 479000
G-Sec Gross Borrowings till Date 461000
G-Sec Gross Borrowing Completed (%) 80.93%
Net G-Sec Borrowings till date 370385
OMO Purchases till date 54573
OMO Contribution to Gross Borrowing till Date 12%

The graph below shows the 10 year Gsec yields and the OMO purchases conducted by
Source: RBI