Context:
RBI announces over USD 21 Billion Liquidity Infusion to support growth through OMOs and Swap auction
Open Market Operations (OMOs):
- Refer to a central bank’s activity of selling or purchasing securities in the open market.
- Purpose – It is a monetary policy tool used to control inflation and manage the money supply in the system.
- Reserve Bank of India (RBI) uses OMOs to adjust the rupee liquidity conditions in the market on a lasting basis.
- When the RBI detects excess liquidity in the market, it sells government securities to absorb the surplus rupee liquidity.
- Impact – Selling securities reduces money supply, increases interest rates, makes loans more expensive, and decreases economic activity.
- When liquidity is tight, the RBI buys securities from the market, injecting liquidity into the system.
- Impact – Buying securities increases money supply, lowers interest rates, makes loans easier to obtain, and stimulates economic activity
Other Liquidity Infusion Instruments:
- Quantitative tools – Liquidity Adjustment Facility (Repo and Reverse repo), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Bank Rate, etc.
- Qualitative tools – Credit Rationing, Moral Suasion, Selective Credit Control (SCC), Margin Requirement, etc.
Source: PTI
Previous Year Question
With reference to India, consider the following statements:
1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market.
2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India.
3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
[UPSC Civil Services Exam – 2021 Prelims]
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
Answer: (b)