Open market operations are conducted by the RBI by way of sale or purchase of government securities (G-Secs.) to adjust money supply conditions.
The central bank sells G-Secs to suck out liquidity from the system and buys back G-Secs to infuse liquidity into the system.
These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
The RBI uses OMO (Open market operations) along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
What is a Government Security?
A Government security is a tradable instrument issued by the Central Government or the State Governments.
It acknowledges the Government’s debt obligation.
Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more).
In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.