Relevance: GS-3 (Indian Economy – Monetary Policy); Source: The Hindu, RBI MPC briefing

The Reserve Bank of India announced large-scale Open Market Operation (OMO) purchases of government securities worth ₹1 lakh crore to inject durable liquidity into the banking system, along with a USD/INR buy-sell swap to ease liquidity pressures.

Key Concepts

• Government Securities (G-Secs):
  Tradable debt instruments issued by the Union Government, considered risk-free. They include dated securities and Treasury Bills.
• Open Market Operations (OMO):
  Monetary policy tool where RBI buys or sells G-Secs to regulate liquidity.

• RBI buying G-Secs → injects liquidity
  
• RBI selling G-Secs → absorbs liquidity
  

• Forex Swap (USD/INR Buy-Sell): A liquidity tool where RBI buys dollars now and commits to sell later, temporarily affecting rupee liquidity without targeting the exchange rate.

Impact on the Economy

• Injects durable liquidity into banks → improves credit flow.
  
• Helps manage volatility in bond yields.
  
• Supports smoother monetary transmission.
  
• RBI clarifies market determines rupee’s value; the step is for liquidity, not exchange-rate support.
  

Q. Consider the following statements:

1. When RBI conducts OMO purchases, the liquidity in the banking system decreases.
   
2. Government securities issued by the Union Government carry no credit risk.
   
3. A buy-sell USD/INR swap by RBI is used to stabilise the rupee’s exchange rate.
   

Which of the above statements is/are correct?
A. 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3

Correct Answer: A (2 only)