RBI conducts OMO, Operation Twist for Government Securities: What is OMO & Why RBI conducts Open Market Operations
RBI conducts OMO or Operation Twist for sale & purchase of Government Securities of Rs 10000 crore each. RBI is conducting Open Market Operations (OMO) to infuse liquidity in market. Know here what is OMO, Why RBI conducts OMO and other details.
Reserve Bank of India (RBI) has announced fresh Open Market Operations (OMO) for the sale and purchase of Government Securities. The RBI will conduct the sale and purchase of government securities on July 2, 2020 of Rs 10,000 crore each. The RBI took the decision after considering the current liquidity and market situation. Here in this article, we have explained what is OMO, why RBI conducts the OMO, what is operation twist and other details related to the Open Market Operations.
In order to participate in the OMO, bidders and participants need to submit their bids on the E-Kuber system (Core Banking Solution) of the RBI in electronic format. The bids can be submitted from 10:00 am and 11:00 am on July 2. The RBI would accept offline bids only in the case of system failure. In such situation, offline or physical bids need to be submitted to Financial Markets Operations Department in the format prescribed by the central bank. The RBI will announce the result of OMO on July 2 itself.
Let's now have a look at what is OMO, Process of OMO and the reason behind it:
What is OMO?
OMO is abbreviated as Open Market Operations. The OMOs are conducted by the RBI in the form of sale and purchase of Government Securities (G-Secs) to adjust liquidity in the market. If there is excess liquidity, then RBI undertakes sale of G-Secs and if there is liquidity crunch, then RBI conducts purchase of G-Secs.
How RBI conducts the OMO?
The OMO is conducted in the form of sale and purchase of government securities. The RBI issues securities through auctions which are conducted electronically on the Core Banking Solution (CBS) platform named E-Kuber. The auction is also conducted physically in case of system failure.
Why RBI conducts the OMO?
The RBI conducts the OMO to manage the liquidity situation in the economy. Have a look at the motive behind the conduct of Open Market Operations:
When there is excess liquidity --> Sale of Government Securities --> To drain liquidity off the market
When there is Liquidity Crunch --> Purchase of Government Securities --> To infuse liquidity in the market
What are Government Securities?
Government Securities are financial instruments or bonds - securities that are issued at face value by Central Government for raising a loan from public. The Government Securities are issued to finance important projects and manage budget deficits. The Government securities can be:
- Bearer Bonds
- Promissory Notes
- Bonds in Bond Ledger Account
- Treasury Bills
- Cash Management Bills
- State Development Loans
What are advantages of investing in Government Securities in OMO?
The G-Secs are issued in form of interest-bearing dated securities which have:
- Zero risk of default
- Fixed rate of interest
- Fixed maturity period
- Carry half-yearly interest payments
- Issued at face value
- No TDS reduction on interest payment
How purchase and sale of Government Securities under OMO benefit the investors?
The price of government securities are usually linked to the existing rate of interest. If the rate of Interest rises, price of government securities falls and vice-versa. Investors can get substantial profits when they buy securities when interest rates are high and sell securities at high prices when interest rate falls.
Why should one invest in Government Securities?
- Investing in Government Securities provides return in form of interest
- G-Secs offer maximum safety
- They can be retained in book entry, thus, preventing the need of safekeeping and can also be held in physical form
- They can be sold in secondary market easily to meet cash requirement
- They can be used as collateral for borrowing funds in repo market
What is Operation Twist?
"Operation Twist" was first used by the Federal Reserve of United States in 1961 while recovering from recession after the Korean War. The Reserve Bank of India conducted its own version of Operation Twist for the first time in December 2019 through purchase and sale of government securities under the OMO - Open Market Operations.