The Reserve Bank of India
may need to sterilize the liquidity that will eventually find its way into the
financial system once the government starts spending the staggering Rs. 1,76,051 crore surplus which was approved to be transferred
by its central board last week.
In its capacity as
the government’s banker and debt manager, the RBI may have to manage the
surplus liquidity to stanch its possible inflationary effect.
Article Continues Below
In this regard, the
RBI may resort to open market operation (O.M.O.) sales (of government securities)
to suck liquidity out of the financial system, otherwise it could have
implications on the inflation front, say market experts.
O.M.O. sales could be
over and above the routine Reverse Repo auctions that the RBI conducts under its
liquidity adjustment facility.
Under the Reverse Repo auction, banks deploy their surplus liquidity with the RBI. As part of
this transaction, banks purchase securities from the RBI with an agreement to
resell them to the latter on a mutually agreed future date at an agreed price
which includes interest for the funds lent.
Under O.M.O., the RBI
resorts to sale of securities to suck out the rupee liquidity. When the
liquidity conditions are tight, RBI buy securities from the market, releasing
liquidity.
Thanks to - K Ram Kumar Mumbai
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