Impact of RBI’s ₹1 Lakh Crore OMO Purchases on Liquidity and Interest Rates

The Reserve Bank of India announces ₹1 Lakh Crore worth of Open Market Operations (OMO) purchases. It has drawn a significant attention from economists, markets and citizens around the country. This move is not a regular or routine exercise which RBI follows but a strategic monetary intervention which aims to stabilize financial conditions, influencing interest rates and supporting economic growth. Unlike policy rate cuts or hikes OMO are subtle yet most powerful instruments that influence the financial system.

What is OMO?

OMO refers to the Open Market Operations that means selling and buying of government securities by the Reserve Bank of India in the open market. OMO Purchase leads to inject durable liquidity and OMO Sale leads to absorb excess liquidity. Unlike other measures, OMO purchases creates a  long term liquidity in the financial system. This move by RBI is nothing temporary but addressing structural liquidity tightness.

Impact on Liquidity: Channels and Mechanisms

There are several micro financial factors that lead RBI to take this step. It was although needed for aggressive liquidity infusion. The impact of this would be a little long term on the market in India such as:

Short and Long Term Rates

OMO purchases ease overnight and borrowing costs by increasing surplus liquidity and Reducing banks dependence on inter bank borrowing. This anchors short term rates around the policy corridor.

OMO buying increases demand for government securities, resulting in Higher bond prices and Lower yields. This also influences Corporate yields and long term lending rates which is crucial for maintaining orderly yield curve.

Effect on Bank and Financial Institutions

1. Balance Sheet Support: As the bank holds the G sections benefit from Price appreciation, Reduced MTM losses and Improved Capital Adequacy.
2. Lending Rate Moderation: As lower funding stress allows banks to Reduce MCLR and align external benchmark linked rates more efficiently. This leads to improved affordability of loans.

Inflation Trade Off and RBI’s Policy Balance

As the liquidity infusion growth, RBI remains cautions due to the Sticky core inflation, Food price volatility and Global Commodity uncertainty. The smart move which RBI played was OMO purchases instead of cutting Repo Rate. It leads to support liquidity, Avoid sending an overly dovish inflation signal. This also indicated Price Stability with growth support.

Improved Credit Availability

Better liquidity enables banks in various sectors. It leads to expand credit, reduce risks and support MSME and retail borrowers. This steps concludes to be very important as growth needs support but inflation prevents aggressive rate cuts.

Durable Liquidity Injection

When RBI buys government securities bank then receives cash directly, their reserves balances improve, overall system liquidity increases on a lasting basis. These help banks in managing daily operations smoothly and regulate requirements on time.

Difference Between OMO and Other Liquidity Tools

The table below suggests a clear difference between the OMO and Other Liquidity Tools by bifurcating in different aspects. It would help in better understanding for the sources: