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RBI TO CONDUCT FIRST-EVER OMO PURCHASE OF SDLS ON OCTOBER 22

RBI TO CONDUCT FIRST-EVER OMO PURCHASE OF SDLS ON OCTOBER 22

Context

Reserve Bank of India to conduct its first-ever Open Market Operation (OMO) purchase of State Developments Loans (SDLs) on 22nd October.

About Open Market Operation (OMO)  

  • It means the purchase and sale of securities by the RBI.
  • For instance, in an inflationary scenario, the RBI will start selling government securities, the selling of securities will reduce money supply from the system.
  • Since the buyer of the securities will pay for them in Rupee, hence currency from the system goes out.
  • Reduction in the money supply will lead to a reduction in funds with the commercial banks, which further reduce their lending capability. A fall in lending thus contracts credit in the economy.
  • However, there are certain limitations that affect OMO viz; underdeveloped securities market, excess reserves with commercial banks, indebtedness of commercial banks, etc.

About State Development Loans (SDLs)

  • These are dated securities issued by states to meet their market borrowings requirements. In effect, the SDL is similar to the dated securities issued by the central government.
  • Purpose of issuing State Development Loans is to meet the budgetary needs of state governments. Each state can borrow up to a set limit through State Development Loans.

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