Why in News?
Under the recently announced Government Security Acquisition Programme (G-SAP) by RBI,the central bank will purchase government bonds of worth Rs 1 trillion.
By this move, RBI will ensure there is no disruption in the Indian market, due to large borrowings by the GoI in this FY.It will serve the purpose of OMO.
About the process:
- Simultaneous purchase and sale of G-Secs under OMOs, involves purchasing G-Sec of longer maturities and selling equal amounts of G-Sec of shorter maturities.
About Open Market Operations:
- OMO refers to buying and selling of bonds issued by the Government in the open market.
- It is one of the quantitative tools that RBI uses to smoothen the liquidity conditions.
Impact on Money Supply:
- When RBI buys a G-Sec in the open market, it pays for it thereby increasing the money supply in the economy.
- Types of OMOs: Selling of a G-Sec by RBI (to private individuals or institutions) leads to reduction the money supply.
- Outright OMOs: These are permanent in nature i.e., if RBI buys or sells these securities, it is without any promise to sell or buy them backat a later date.
- Repo: Under these operations when RBI buys or sells the security, the agreement also has specification about date and price of resale or repurchase of this security. This is called are purchase agreement or repo.
- The interest rate at which the money is lent in such a way is called the repo rate.