Classification of Open Market Operations

Classification of Open Market Operations

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Open Market Operations allude to a type of monetary policy in which a central bank controls liquidity by simultaneously buying and selling government securities and treasury bills. To put it another way, securities are traded to control how much money is in a country's banking system, which has an effect on its economy. These trades with other banks are made by central banks, who also decide how much to trade. To decide how much it wants to trade, it targets the key policy rate, also known as the repurchase or repo rate in India. In theory, this also has an effect on the economy of India's other interest rates. As a result, open market operations alter money supplies, which in turn alter the supply of loans, and interest rates, which in turn alter the demand for loans by individuals. The RBI sells government securities when it believes that the economy has too much liquidity. Liquidity quickly evaporates as a result of its enormous sales volume. The RBI purchases government securities when liquidity conditions are tight, releasing liquidity into the market.

Classification of Open Market Operations (OMOs) - Open market operations can be broadly divided into two categories:

1. Permanent Open Market Operations - In this sort of OMO, a national bank straightforwardly buys and sells government protections. In the past, procedures like these have had long-term benefits that could solve issues like inflation, unemployment, currency price fluctuations, etc. Permanent OMO involves selling short-term securities continuously and without a set limit.

2. Temporary open market operations - are typically carried out to satisfy reserve requirements or meet short-term financial requirements. For situations like these, the RBI uses reverse repos or repo. With the guarantee to sell its resources later, an exchanging work area buys a security from the national bank under a repo understanding.

The interest rate on a security is the difference between the selling price and the purchase price. The central bank may also view it as a short-term collateralized loan. The trading desk sells the security to the central office of a bank in a reverse repo, promising to purchase it later. Utilizing repos and reverse repos, these transient open Market Operations are carried out overnight.