In recent news, a crucial decision has been made by the Reserve Bank of India (RBI). RBI has planned to simultaneously buy and sell government securities, also known as G-Sec, under Open Market Operations (OMOs). The transaction volume for both actions has been set at 10,000 crore rupees each.
About Simultaneous Purchase and Sale of Government Securities
The practice of conducting simultaneous purchase and sale of government securities under open market operations is known as operation twist. This procedure involves purchasing G-Secs that have longer maturities and selling G-Secs of shorter maturities in equal amounts.
What are Open Market Operations?
Open market operations refer to the buying and selling of government-issued bonds in the open market. It is considered one of the quantitative tools that the RBI relies on. The primary aim of these OMOs is to smoothen out the liquidity conditions throughout the year and minimize their impact on interest and inflation rates. Other quantitative tools used to control the money supply include changing the Cash Reserve Ratio (CRR), bank rates, or executing open market operations.
On the other hand, qualitative tools like moral suasion and margin requirements, etc., are used to encourage or discourage lending by commercial banks.
Impact on Money Supply
When the RBI buys a government bond from the open market, it pays for it using a cheque, which increases the reserves in the economy and, consequently, the money supply. Conversely, when the RBI sells a bond to private individuals or institutions, it results in the reduction of reserves and hence, the money supply.
Types of Open Market Operations
OMOs can be categorized into two types – Outright and Repo. Outright OMOs are permanent; the central bank purchases these securities without any promise to sell them later, and vice versa. In Repo type OMOs, the central bank agrees to buy the security with a specified date and price for resale. This agreement is known as a repo, while the interest rate of lending in this manner is called the repo rate.
About Government Securities
Government Securities (G-Secs) are tradable instruments issued by either central or state governments, acknowledging their debt obligation. Short-term securities with less than one year maturity are called Treasury Bills. In contrast, long-term securities with more than one year maturity are referred to as government bonds or dated securities.
These securities carry almost no risk of default and are thus labeled as risk-free gilt-edged instruments. They are offered by governments and large corporations as a means of borrowing funds.
As a recent development, RBI has proposed allowing retail investors to open gilt accounts directly with the central bank, which would facilitate their investment in G-secs without the need for intermediaries.
