RAS question
Open Market Operations (OMO) involve:
Correct answer: (B) Sale and purchase of government securities by RBI in the open market.
Open Market Operations are the RBI's buying and selling of government securities in the open market to inject or absorb durable liquidity in the banking system.
Explanation
Open Market Operations sit within the RBI's liquidity-management toolkit. The cited RBI guide places OMOs alongside LAF, MSF, standing liquidity facilities and MSS as channels through which the RBI injects or absorbs liquidity in the banking system. It then defines OMO directly: the buying and selling of government securities in the open market to inject or absorb durable liquidity in or from the banking system. That is why option B is the right answer. The key words are government securities, open market and RBI purchase or sale. Buying securities adds liquidity; selling securities absorbs liquidity. This is different from changing reserve requirements or lending through the repo window.
Why the other options are wrong
- (A) Issuing new currency notes concerns currency issuance, whereas OMO is specifically the RBI's open-market purchase and sale of government securities.
- (C) Changing CRR requirements alters banks' reserve obligation, while the RBI guide treats OMO as a separate liquidity operation involving government securities in the open market.
- (D) Lending to banks at the repo rate is a repo or LAF operation; OMO instead uses outright open-market buying and selling of government securities.
Concept
This tests monetary policy instruments, especially the difference between OMO, CRR and repo operations. It recurs in RAS because RBI liquidity management is a standard Indian Economy area where similar tools are often confused.