RBI’S OPEN MARKET OPERATIONS

RBI’S OPEN MARKET OPERATIONS

Why is this issue in the news?

• During the December 2025 monetary policy review, the Reserve Bank of India (RBI) announced measures to inject durable liquidity into the financial system.
• The RBI will conduct:
  • Open Market Operation (OMO) purchases of government securities worth ₹1 trillion, and
  • A three-year USD–INR buy/sell swap amounting to $5 billion.
• These steps were announced to support market stability and to strengthen monetary policy transmission.
• RBI Governor Sanjay Malhotra stated that these actions would ensure adequate and durable liquidity in the banking system.

WHAT IS LIQUIDITY & WHY IS IT IMPORTANT?

• Liquidity refers to the availability of money in the banking system.
• When liquidity is adequate:
  • Banks can lend smoothly.
  • Interest rates stay close to the RBI’s policy rate.
  • Monetary policy decisions are transmitted effectively to the economy.
• When liquidity is tight:
  • Borrowing costs rise.
  • Policy transmission becomes weak.

WHAT IS OMO?

• Open Market Operations (OMOs) are a major monetary policy tool used by the RBI.
• Through OMOs, the RBI buys or sells government securities in the open market to manage liquidity.

How OMOs work

• OMO purchase:
  • RBI buys government securities from banks.
  • RBI pays money to banks.
  • Liquidity increases in the banking system.
• OMO sale:
  • RBI sells government securities to banks.
  • Banks pay money to RBI.
  • Liquidity decreases in the system.

In December 2025, RBI announced OMO purchases, which means liquidity injection.

WHY RBI ANNOUNCED A ₹1 TRILLION OMO PURCHASE?

The RBI’s decision is linked to currency pressure and financial market conditions.

A. Pressure on the Indian rupee

• The Indian rupee crossed the psychological 90-mark against the US dollar.
• Sharp depreciation often signals:
  • Foreign investor outflows, and
  • Higher demand for dollars.

B. Foreign outflows and liquidity drain

• When foreign investors pull out money:
  • Rupee liquidity reduces.
  • Banking system faces liquidity stress.

OMO purchases replenish liquidity by injecting durable funds into banks.

HOW DO OMOs HELP DURING RUPEE DEPRECIATION?

Periods of currency stress often lead to:

• Tight money-market conditions.
• Higher call money rates and short-term yields.

Role of OMO purchases

• Increase rupee liquidity in banks.
• Ease pressure on short-term interest rates.
• Ensure smoother inter-bank lending.
• Support stability during volatile market conditions.

HOW DO OMOs HELP MONETARY TRANSMISSION?

• Monetary transmission means how effectively RBI’s policy decisions reach banks, borrowers, and markets.
• Uneven liquidity across banks can:
  • Distort interest rates.
  • Reduce the impact of repo rate cuts.
• Durable liquidity through OMOs:
  • Creates uniform liquidity conditions.
  • Helps banks align lending rates with the policy repo rate (5.25%).
  • Improves the efficiency of RBI’s policy actions.

 OMO V/S REPO OPERATIONS

RBI Governor Sanjay Malhotra clearly explained the difference between OMOs and repo operations.

Open Market Operations (OMOs)

• Objective: Provide or absorb durable liquidity.
• Impact: Long-term liquidity management.

Repo operations

• Objective: Manage short-term or transient liquidity.
• Impact: Usually overnight or very short period.

Operating target of RBI

• RBI uses these tools to align the Weighted Average Call Rate (WACR) with the policy repo rate.
• The repo rate currently stands at 25%.

USE OF MULTIPLE TOOLS TOGETHER

RBI stated that it can:

• Inject durable liquidity through OMO purchases, and
• Withdraw short-term liquidity simultaneously through Variable Rate Repo (VRR) operations, if required.

This flexible approach allows RBI to fine-tune liquidity conditions without creating instability.

WHAT IS THE BROADER ECONOMIC BACKDROP?

• RBI Governor highlighted that despite a challenging global environment, India’s economy remains resilient.
• Global uncertainties include:
  • Slowing global growth.
  • Geopolitical tensions.
  • Financial market volatility.
• Despite these factors:
  • India is expected to maintain strong growth momentum.
  • A favourable inflation outlook has given RBI the space to remain growth-supportive.

WHY THIS DECISION MATTERS?

• Supports banking system liquidity.
• Prevents excessive tightening in money markets.
• Strengthens monetary policy transmission.
• Helps manage volatility caused by rupee depreciation.
• Reinforces market confidence during uncertain global conditions.

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