After the recent inclusion of Indian government securities (G-Secs) in the global bond index, there will be additional inflows from foreign investors. According to analysts, this will lead to a spike in the demand for bonds, leading to an increase in prices.
The Reserve Bank of India (RBI) could address this particular demand-supply mismatch through Open Market Operation (OMO) sales.
So, what exactly is OMO? An OMO typically refers to the sale or purchase of Government Securities (G-Secs) by the RBI in the open market.
Generally, OMOs aid the apex bank in managing rupee liquidity in the market while keeping bond yields at desired levels.
In fact, OMO is one of the quantitative tools that the central bank uses to address the liquidity condition concerns all through the year while trying to minimise its impact on the interest rate and inflation rate levels.
In a scenario with excess liquidity, the central bank sells G-Secs and sucks out the extra. On the other hand, to inject liquidity, the RBI buys bonds. Typically, yields refer to the annual return one gets on a bond. It is to be noted that bond yield and prices move in opposite directions.
The government is the biggest issuer of bonds and often uses it to raise money to fund expenditures. So, when yields witness a rise, the government’s borrowing costs jump. In this regard, the RBI uses OMOs to keep yields low and lower the government’s borrowing costs.
In the current scenario, the OMO sales option by the RBI will also address liquidity management in FY25. The central bank will most likely absorb the dollar inflows after inclusion, which will give a push to the rupee liquidity in the banking system and to address this, OMO sales by the RBI will prove to be effective, say experts.
Through OMO sales, the central bank will sell G-Secs in the market and absorb the liquidity from the banking system along with its liquidity management tool.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.