In News:

In its December 2025 policy review, the Reserve Bank of India (RBI) announced a large-scale Open Market Operation (OMO) purchase of government securities worth ?1 trillion, along with a three-year dollar–rupee buy/sell swap of USD 5 billion, to inject durable liquidity into the financial system. These steps were intended to stabilize markets, strengthen monetary transmission, and support overall financial stability amid pressures on the Indian rupee.

What are Open Market Operations (OMOs)?

Open Market Operations (OMOs) are a key monetary policy instrument used by a central bank to regulate liquidity and influence interest rates by buying and selling government securities in the open market.

• OMO Purchase: When the RBI buys government securities, it injects money into the banking system. This increases liquidity, lowers interest rates, and encourages lending and investment.
• OMO Sale: When the RBI sells government securities, banks pay money to the RBI, which reduces liquidity and tends to push interest rates upwards.

OMOs help the central bank achieve its monetary policy objectives, including inflation control, growth support, and exchange rate stability.

Objectives of OMOs

1. Control Inflation: By selling securities, the RBI can reduce the money supply in the economy, leading to higher interest rates that help dampen excess demand and contain inflationary pressures.

2. Boost Economic Growth: During economic slowdowns or liquidity shortages, OMO purchases inject funds into the banking system. This reduces borrowing costs, encourages credit flow, and supports economic activity.

3. Manage Exchange Rate Pressures: OMOs can influence the exchange rate of the Indian rupee by affecting domestic liquidity conditions. For example, when the rupee weakens sharply (such as crossing key levels against the US dollar), injecting liquidity through OMO purchases can help ease pressure on money markets and improve rupee liquidity.

Why RBI used OMO in December 2025

The announcement came amid sharp depreciation of the Indian rupee, which had crossed the ?90 per US dollar mark. Exchange rate stress often leads to foreign investor outflows, which drain liquidity from the banking system. Reduced liquidity can push up short-term interest rates and weaken monetary policy transmission.

By purchasing government securities under OMOs, the RBI aimed to inject durable funds into banks, improve rupee liquidity, and support smoother transmission of its policy stance across money markets. The RBI also clarified that OMOs differ from short-term tools like repo operations, which manage transient liquidity fluctuations.

OMO and Monetary Policy Tools

• OMO vs Repo:
  • OMO is used for durable liquidity adjustments by buying or selling securities outright.
  • Repo and Reverse Repo Operations are short-term liquidity operations in the collateralised money market.
• Variable Rate Repo (VRR): The RBI can inject durable liquidity via OMOs while withdrawing short-term liquidity using VRR operations to align short-term rates with the policy repo rate.

As of December 2025, the RBI’s policy repo rate was 5.25%, reflecting an accommodative stance to support growth while managing inflation risks.

Significance

OMOs remain a central pillar of monetary policy implementation. They help the RBI balance price stability and growth objectives, maintain financial market stability, and manage systemic liquidity over the medium term. In the context of exchange rate volatility and global financial uncertainties, durable liquidity measures through OMOs can provide confidence and resilience to India’s financial system.

In News:

The Reserve Bank of India (RBI) has announced a liquidity injection of ?1.9 lakh crore into the banking system through Open Market Operations (OMOs) and USD/INR forex swaps, in response to tightening liquidity conditions observed since December 2024.

What are Open Market Operations (OMOs)?

• Open Market Operations refer to the buying and selling of government securities in the open market by the central bank to regulate liquidity in the banking system.
• It is a monetary policy tool used to manage inflation and ensure financial stability.

How OMOs Work:

• To inject liquidity: RBI purchases government securities from banks, increasing their cash reserves, which lowers interest rates, encourages lending, and boosts economic activity.
• To absorb liquidity: RBI sells government securities, reducing cash reserves in the system, which raises interest rates, discourages excessive lending, and cools inflation.

RBI’s Recent Measures (March 2025):

• OMO Purchase Auctions:Government securities worth ?1 lakh crore to be bought in two tranches of ?50,000 crore each on March 12 and March 18.
• Forex Swap Auction:
  • A USD/INR Buy/Sell Swap worth $10 billion with a 36-month tenor, scheduled for March 24, to inject long-term dollar liquidity.
  • A similar $10 billion swap was conducted on February 28, which saw strong demand.