Open Market Operations (OMO) refer to the buying and selling of government securities by the central bank of a country in the open market. The purpose of OMO is to influence the money supply in the economy and control key monetary policy variables such as the interest rates.
In an open market operation, the central bank buys or sells government securities such as treasury bills or bonds from or to the commercial banks or other financial institutions operating in the economy. When the central bank buys government securities, it injects money into the economy, increasing the money supply and reducing interest rates. On the other hand, when the central bank sells government securities, it reduces the money supply, leading to an increase in interest rates.
Open market operations are the most common monetary policy tool used by central banks to control the money supply and achieve their policy objectives. By using open market operations, central banks can effectively manage the money supply, influence interest rates, and stabilize the economy.
