Question

Write short note on Open Market Operations (OMO).

Answer 1

An open market operation (OMO) is an activity by a central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks. The central bank can either buy or sell government bonds in the open market (this is where the name was historically derived from) or, in what is now mostly the preferred solution, enter into a repoor secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral. A central bank uses OMO as the primary means of implementing monetary policy. In the United States, as of 2006[citation needed], the Federal Reserve sets an interest rate target for the federal funds (overnight bank reserves) market.