RBI’s newly appointed governor Shaktikanta Das had said the Central Bank is open to infusing “need-based” liquidity in the financial system. On 17 January, RBI is set to inject Rs 10,000 crore into the system through open market operations (OMOs). This comes ahead of the central bank’s plan to feed Rs 50,000 crore in January 2019 through OMOs using five auctions of Rs 10,000 crore each.
What are OMOs?
The Reserve Bank of India (RBI) is the central authority to ensure that stability in the economy is maintained. It’s part of the RBI’s job to ensure that money supply in the system is adequate–not too much, that there is an excess of cash, not too little that there is a cash crunch. RBI also has to maintain an ideal level of interest rates, keeping inflation under control. RBI uses open market operations as a tool to regulate the availability of cash flow in the system.
The OMOs are conducted by the RBI by selling and purchasing government securities (g-secs). When RBI wants to cut down the flow of money with banks, it sells g-secs to the banks, sucking the excess money with them. On the other hand, if it wants to inject money in the system, it buys back the g-secs from the banks, increasing the credit supply with the banks. This way, RBI effectively manages the liquidity in the system.
What will it do?
The government has been asking RBI to release more liquidity into the non-banking finance companies (NBFCs). The move to purchase g-secs by the RBI will flush money into the banks. The increased capital will likely make more funds available with the banks to lend out to borrowers. This is fruitful for the individuals and businesses alike. It will also ease the interest burden on credit taken from the banks, since higher liquidity may bring down lending rates, and will be good news for loans and EMI’s. With the general elections scheduled to be this May, the government is seeking extra funds to finance populist measures like financial aides to farmers, Reuters said in a recent report. The latest move by the RBI might prove to be beneficial for the government in this regard.
- By Sania Ashraf