Market Operations (OMO) Inflation → Sell G-Sec, Deflation → Buy

Question 1

What are Open Market Operations (OMO)?

Answer 1

OMOs are activities by the Reserve Bank of India (RBI) where they buy and sell Union & State Government securities to influence the money supply in the economy.

Question 2

How does the RBI use OMOs to combat inflation and deflation?

Answer 2

Inflation: The RBI sells government securities (G-sec) to reduce the money supply, helping to control inflation.
Deflation: The RBI buys government securities (G-sec) to increase the money supply, aiming to stimulate economic activity.

Question 3

What is the purpose of the Market Stabilization Scheme (MSS)?

Answer 3

The MSS is a tool used by the RBI to absorb excess liquidity from the market. It involves selling special types of government securities (G-sec), Treasury Bills (T-Bills), and Cash Management Bills (CMB).

Question 4

What is the primary goal of Sterilization / Forex Swap operations?

Answer 4

The main objective of these operations is to manage volatility in the currency exchange rate (e.g., how many rupees it takes to buy one US dollar).

Question 5

Briefly explain Operation Twist (2019).

Answer 5

Operation Twist is a special form of Open Market Operation (OMO) where the RBI simultaneously buys long-term government securities and sells short-term government securities. Its aim is to influence the overall structure of interest rates.