RBI’s ₹1 Trillion OMO Purchase: What It Means and Why It Matters
The Reserve Bank of India (RBI) recently announced two major liquidity measures, a ₹1 trillion Open Market Operation (OMO) purchase and a $5 billion dollar-rupee swap. The move comes at a time when the rupee has crossed 90 per US dollar, putting pressure on financial markets and banking liquidity.
An Open Market Operation is a key monetary policy tool used by the RBI to regulate liquidity in the banking system.
These operations help stabilise interest rates, support credit flow, and influence overall financial conditions in the economy.
The rupee’s sharp fall and foreign investor outflows drained liquidity from banks. When investors exit markets, they take money out, creating stress on rupee availability. To address this, RBI Governor Sanjay Malhotra announced the OMO purchase, saying it will strengthen monetary transmission and support market stability. This indicates that the RBI aims to keep borrowing costs aligned with its policy stance while smoothing funding pressures for banks.
A falling rupee usually triggers:
To prevent these from disrupting the economy, OMOs work in three key ways:
Foreign withdrawals reduce rupee supply. An OMO purchase injects durable funds into banks, helping them continue lending smoothly.
Dollar demand pressures increase call money rates and short-term yields. By adding liquidity, OMOs prevent rates from spiking.
Uneven liquidity can weaken the RBI’s policy impact. OMO injections ensure smoother transmission of repo rate cuts and other policy changes.
Governor Malhotra highlighted a crucial distinction:
| OMO Purchases | Repo Operations |
|---|---|
| Manage durable liquidity | Manage temporary liquidity |
| Affect long-term money supply | Address day-to-day cash mismatches |
The RBI’s move comes amid concerns over currency stability, but the central bank remains optimistic about India’s growth trajectory.
According to Governor Malhotra:
This suggests that while global volatility is high, RBI believes domestic fundamentals remain strong.
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