What is OMO, on which RBI will spend Rs 1 lakh crore, will it affect your money?

New DelhiReserve Bank of India (RBI) has announced open market operation i,e, OMO purchase of Rs 1 lakh crore, RBI made this announcement after the MPC meeting that ended on December 5, Along with this, a 3-year USD-INR Buy-Sell swap of 5 billion dollars will also be done so that sustainable liquidity can be injected into the banking system, The reason is that due to advance tax in December, a lot of cash goes out of the banks and cash shortage starts in the system,

Reserve Bank of India Governor Sanjay Malhotra clearly said that RBI will provide whatever permanent liquidity the system requires. This step has come when money has started being withdrawn continuously from the banks in the beginning of December and there was a need to give confidence to the market.

What is OMO and why does RBI use it?

• OMO means Open Market Operations. This is the oldest and most powerful tool of RBI with which it buys or sells government bonds.
• When RBI buys government bonds, it injects money into the market. It is called Durable Liquidity because it remains in the system for a long time.
• When RBI sells bonds, it withdraws money from the market.

This time RBI will purchase government securities worth Rs 1 lakh crore so that banks do not face shortage of cash. This is the seasonal time when a lot of cash goes out of the banking system due to tax payment, hence the cash is replenished through OMO.

What is LAF, in which RBI gave figures

• LAF means Liquidity Adjustment Facility. This is a short term tool. Under this, RBI gives short-term money to the bank through Repo.
• Withdraws money from banks through Reverse Repo or VRRR.

RBI clearly said that the objectives of both OMO (which injects permanent liquidity) and LAF (which handles small daily shortfalls and excesses) are different.
Therefore, it is absolutely possible that on one hand RBI will inject money from OMO and on the other hand it will withdraw money from VRRR for some time.

Why the $5 Billion USD-INR Buy-Sell Swap

This step is a long-term way of withdrawing liquidity from the dollar market and injecting liquidity into the rupee market. When RBI does a Buy-Sell swap, it buys dollars today and promises to sell them after 3 years. In return, a huge amount of money comes into the system.

Its advantage is that:

• Forex market remains stable
• Funding becomes cheaper and easier in rupees
• Cash is available in the banking system for a long time

Why was such a big OMO necessary?

There are some big reasons behind this.

• Due to Advance Tax in December, several lakh crore rupees go out of the system.
• This shortage of cash may force banks to borrow expensive money.
• WACR i.e. Interbank Call Rate goes up, due to which there is a danger of loan rates and bond yields increasing.
• The market needed assurance that RBI would not allow panic.

RBI says that its objective is only liquidity management, not to directly control G-sec yields.

What effect does it have on your pocket?

• If cash increases in the market, there will be less pressure on short term interest rates.
• Banks will be able to raise funds at lower loan costs.
• This may have a soft impact on EMI in the future, but it will not have an immediate impact.
• Government bond yields will remain stable, which will reduce fluctuations in the bond market.