MPC Meeting: Open Market Operations Sale Temporarily On Pause

In the recent Monetary Policy Committee (MPC) meeting, the decision was made to put open market operations (OMO) sales on hold for some time.

Discussing the consideration, RBI governor Shaktikant Das said, “We have not said that OMO (open market operation) sales are off the table. All we have said is that due to certain factors beyond our control, the need for OMO sales has not come up so far. The tool remains on the table and will be used, if and when required, depending on evolving liquidity conditions." 

In macroeconomics, an open market operation (OMO) is an activity performed by a central bank to provide or withdraw liquidity in its currency from a bank or a group of banks.

To do this, the central bank can either purchase or sell government bonds in the open market or as is now mostly preferred, enter into a repo or secured lending transaction with a commercial bank. In this scenario, the central bank gives the money as a deposit for a specific period and simultaneously takes an eligible asset as collateral.

“On the stance of liquidity, the governor said that there was no need for “OMO sales” with liquidity remaining tight. This is a big relief to the bond markets, which were edgy on OMO sales expectations,” said Anitha Rangan, Economist, Equirus.

OMO sales are an instrument used by central banks to curb liquidity in the market. RBI by selling the government bonds into the market, tries to sweep surplus money from the market.

“The high-interest rates prevailing now make a case for increasing allocation to debt in the portfolio to mitigate any material correction in the Equity portfolio. Investors should remain agile in their investments considering regulators have become a variety of excesses forming in the financial space in both lending and investing,” said Vijay Kuppa, CEO, InCred Money.

The benchmark lending rate or the repo rate will remain unchanged at 6.5 per cent, Reserve Bank of India (RBI) Governor Shaktikanta Das released on 8 December, following the conclusion of the three-day meeting of the central bank's Monetary Policy Committee (MPC).

"RBI positioned its prudent stance keeping the repo rate unchanged at 6.25 per cent and signaled to remain focused on withdrawal of accommodation. This certainly is music to investor’s ear by subtlety communicating peaking of the interest rate cycle, with no increase in interest rate in sight,” said Umeshkumar Mehta, CIO, SAMCO Mutual Fund. Further, balance sheet moderation as a percentage of GDP is applauded and shows strength in the independent thought leadership of RBI, he added.