The buying and selling of government securities by the Reserve Bank of India in the open market to manage durable liquidity and the money supply in the banking system.
- An OMO purchase injects liquidity (the RBI pays banks cash for securities); an OMO sale absorbs liquidity (banks pay cash to the RBI for securities).
- It is a quantitative tool of concept monetary policy used for longer-lasting liquidity changes, unlike the day-to-day repo and reverse repo under the Liquidity Adjustment Facility.
- Conducted in dated government securities (G-secs) and treasury bills; the RBI also uses Operation Twist (simultaneous purchase of long-term and sale of short-term G-secs) to shape the yield curve.
- A variant is the Market Stabilisation Scheme (MSS), under which the RBI issues special securities to mop up excess liquidity (used heavily after large forex inflows).
- Affects the volume of bank reserves and hence credit, working alongside the concept repo rate and CRR and SLR.
OMO appears in lists of RBI quantitative tools; the inject-versus-absorb direction (buy injects, sell absorbs) is a common statement trap.
OMO (buying or selling G-secs to change liquidity) versus the repo rate (a price tool); an OMO purchase adds liquidity, it does not drain it.
RBI buys or sells government securities in the open market; buying injects liquidity, selling absorbs it.