OPEN MARKET OPERATIONS
Monetary policy is the policy adopted by every nation’s
central bank to manage the economy with four major objectives vis
- Price stability
- Achieve full employment,
- To ensure reasonable rate of growth and
- To correct balance of payment disequilibrium.
To achieve these objectives it uses various measures such
as bank rate policy, reserve requirements, open market operations, repo and
reverse repo, increasing margin requirements, rationing of credit, moralsuation,
direct action etc. OMO is one among them.
Meaning:
Open market operations simply refer to the sale and purchase
of government securities by RBI. This is mainly done to manage the liquidity in
the economy.
When tackling inflation,
RBI issues government securities into the market and absorb the excess money in
the economy as price for securities. In a deflationary situation RBI purchase back
those securities from the market and thereby injecting funds into the economy.
What are the
various Govt securities?
A Government security is a tradable instrument issued by the
Central Government or the State Governments. It acknowledges the Government’s
debt obligation. Thus these carry no risk at all. It may be short term
(treasury bills) or long term (bonds).
Treasury bills: Treasury bills or T-bills are
short term debt instrument issued by Govt of India. Note that only central Govt
can issue treasury bills and state Govts cannot. At present t- bills are issued
for a maturity of 91 days, 182 days and 364 days. Earlier 7 day and 14 day
treasury bills were available but later they were abandoned by RBI. Treasury bills
carry no interest rates but it is issued at a discount rate from the face value
and at the time of maturity face value is paid to the holder. For example a
treasury bill of Rs 100 for 91 days may be issued at a price of Rs 98 and at
the time of maturity a sum of Rs 100 is paid.
Bonds: Bonds are long term credit instrument issued by Govt. It
carries fixed interest rate.
Dated
Government Securities: Dated Government security is a long term security issued by Govt
and carries fixed or floating interest rate which is paid on the face
value payable at fixed time periods, usually half-yearly. The maturity period
of dated securities can be up to 30 years. It can be issued by central Govt as
well as state Govt. Dated security issued by state Govt is known as State
Development Loans (SDL). This can be kept under SLR and also can be used for
borrowing under Repo.
How securities are
issued?
On behalf of Govt of India RBI issues securities through auctions
conducted at various times. These are conducted in an electronic platform. Commercial banks, scheduled
urban co-operative banks, Primary Dealers, insurance companies and provident
funds, who maintain funds account (current account) and securities accounts
(SGL account) with RBI, are members of this electronic platform.
Who are the
participants in the Govt securities market?
Participants include RBI, commercial banks, primary dealers,
mutual funds, insurance companies, provident fund, pension funds etc.
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