Open Market Operation

What is an Open Market Operation?

Open Market Operation(OMO) refers to buying and selling of government securities by the central government from or to the public and commercial banks of a country. In India, Reserve Bank of India(RBI) is authorized to sell or purchase treasury bills and government securities. It is a credit control method of RBI. As RBI has the sole monopoly in currency issues, it can control credit and supply of money. For this RBI uses this method to control the credit in the economy.

• The sale of securities by the central bank reduces the reserves of commercial banks. It adversely affects the bank's ability to create credit and therefore decreases the money supply in the economy. Selling securities removes the money from the system and making loans more expensive and increasing interest rates.
• The purchase of securities by the central bank increases the reserves of commercial banks and raises the bank's ability to give credit. The central bank is able to increase the money supply and lower the interest rate by purchasing the securities. Buying securities adds money to the system and making loans easier to obtain and simultaneously interest rates decline.