OPEN MARKET OPERATIONS- TWO TYPES

Question 1

What are the two primary types of Open Market Operations (OMOs)?

Answer 1

Repo OMOs and Outright OMOs

Question 2

Describe a Repo OMO.

Answer 2

A Repo OMO is when the RBI buys/sells government securities and agrees to repurchase them later. This is like a repurchase agreement (repo) or a reverse repurchase agreement (reverse repo).

Question 3

Describe an Outright OMO.

Answer 3

An Outright OMO is when the RBI buys/sells government securities without agreeing to repurchase them at a later date.

Question 4

Why does a central bank (like the RBI) use Open Market Operations?

Answer 4

Central banks use OMOs to influence the money supply and interest rates in the economy.