video 49 Monetary policy part 6

Open market operation (OMO) -sale or purchase of government securities by RBI in the open market ( secondary market) To banks/ financial institutions for absorption and injection of durable liquidity in the economy is called open market operation. If the inflation inthe economy is highthen, to control the inflation RBI reduces the Money supply by selling Government securities. And If RBI wants to increase the money supply then it buys Government securities. And if the RBi wants to increase the money supply then it buys government securities from banks / financial institutions and pays them money in exchange of government securities which ultimately increase the money supply in the economy.
There are two types of Open market operation
• Outright OMOs: They are permanent in nature. When the central bank buys/sells these securities, it is without any promise to sell/buy them later.
•LAF OMOs: This is a type of operation in which when the central banks Buys / sells the securities, the agreement also has specifications about the date and Price of Resale / repurchase of this security. This type of agreement is called a repurchase agreement or repo.
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