Special Open Market Operations

The Reserve Bank of India has recently proposed to conduct a Special Open Market Operation (OMO) on November 26th,2020.  This operation would involve simultaneous purchase and sale of securities worth Rs.10,000 crore.

What is Open Market Operation?

Open Market Operation is an activity undertaken by the central bank wherein it involves in the sale or purchase of the government securities. It is one of the quantitative tools for maintaining liquidity in the market. Some other tools used by RBI to manage liquidity are Repo and Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Bank Rate.

Key Points

  • This decision has been made by the central Bank after making a review of the liquidity and financial conditions of the economy.
  • In the special open market operations, RBI will buy and sell same value of securities but of varying maturities. This is done to make changes in the yield of securities.
  • Since the same quantum of securities are purchased and sold, there is generally no change in the liquidity of in the system.
  • RBI has been conducting special open market operations from time to time to smoothen liquidity conditions.

Current Policy Rates

As on November 20, 2020 the policy rates of RBI are-

  • Policy Repo Rate:00%
  • Reverse Repo Rate:35%
  • Marginal Standing Facility Rate :25%
  • Bank Rate:25%

Reserve Ratios

As on November 20, 2020, CRR is 3% and SLR is 18.00%.

What is Repo and Reverse Repo Rate?

Repo rate is the rate at which central bank of a country (RBI for India) lends money to the commercial banks for a short period.  Reverse Repo rate is the rate at which the central bank of a country borrows money from the commercial banks.

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