It is in line with the CBI’s monetary policy to curb inflation, control lending rates in the interbank market and harness the ballooning liquidity.
Banks can now manage their need for liquidity or offer surplus liquidity in the interbank market within the new CBI monetary framework.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
The mechanism provides central banks with the capability to buy government bonds to be able to increase the money base (cash reserves) and, by extension, curb inter-banking lending rates.
In the same vein, selling government bonds reduces the base money and raises interbank rates. OMO also enables banks to hold bonds as collateral in order to borrow from the CBI.