Definition of 'Open Market Operations - OMO'

The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite. An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations is to manipulate the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply, in effect expanding money or contracting the money supply. This involves meeting the demand of base money at the target interest rate by buying and selling governmentsecurities, or other financial instruments. Monetary targets, such as infla Process of open market Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing (creditingor debiting) the amount of base money that a bank has in its reserve account at the central bank. Thus, the process does not literally require new currency. However, this will increase the central bank's requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance. When there is an increased demand for base money, the central bank must act if it wishes to maintain the short-term interest rate. It does this by increasing the supply of base money. The central bank goes to the open market to buy a financial asset, such as government bonds, foreign currency, gold, or seemingly nonvolatile (until the 2008 financial fallout) MBS's [3] (Mortgage Backed Securities). To pay for these assets, bank reserves in the form of new base money (for example newly printed cash) are transferred to the seller's bank and the seller's account is credited. Thus, the total amount of base money in the economy is increased. Conversely, if the central bank sells these assets in the open market, the amount of base money held by the buyer's bank is decreased, effectively destroying base money. tion, interest rates, or exchange rates, are used to guide this implementation. [1][2]

Definition of 'Government Security'

A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government. A government security may be issued by the government itself or by one of the government agencies. These securities are considered low-risk, since they are backed by the taxing power of the government. Government securities offer the benefit of safety, liquidity and attractive returns to investors. With the enactment of the Government Securities Act, 2006 Government securities, including the Relief/Savings Bonds issued by the Government of India, have become more investor friendly. Investors of such bonds will particularly benefit from such changes in the Act. To create public awareness in this regard and as a customer friendly measure, the following Frequently Asked Questions (FAQs) along with the answers have been released by the Reserve Bank of India (RBI). 1. What does one mean by Government security? Government security (G-Sec) means a security created and issued by the Government for the purpose of raising a public loan or any other purpose as notified by the Government in the Official Gazette and having one of the following forms. i. ii. iii. a Government Promissory Note (GPN) payable to or to the order of a certain person; or a bearer bond payable to a bearer; or a stock; or

Definition of 'Bank Rate'

The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired. The bank rate can also refer to the interest rate which banks charge customers on loans.

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances to a commercial bank. Whenever a bank has a shortage of funds they can typically borrow it from the central bank based on the monetary policy of the country. The borrowing is commonly done via Repos (Repurchase) where the Repo rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market. The reverse repo rate is the rate at which the banks can park surplus funds with reserve bank, while the repo rate is the rate at which the banks borrow from the central bank. It is mostly done when there is surplus liquidity in the market.

Definition of 'Rediscount'
The act of discounting a short-term negotiable debt instrument for a second time. Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans. When there is low liquidity in the market, banks can generate cash by rediscounting short-term securities.

REFINANCE BY RBI Reserve Bank of India (RBI), wholly owned by the Government of India, is the central bank of the country having monetary authority, as well as regulatory and supervisory power on the financial system. It's also the issuer of Indian currency as well as the manager of exchange control. Refinance by RBI is meant to help individuals, corporations as well as the overall economy of the country.

Types of Refinance by Reserve Bank of India

There are various types of refinance offered by RBI. Reserve Bank of India permitted the banks to offer refinance on various loans like home, auto etc. However, refinance companies have the restriction to use floating provisions instead of specific provisioning. Refinance by RBI is also offered to boost the growth of SMEs (Small and Medium Enterprises), especially those which are currently facing credit crunch. RBI also offers refinance facility to help out the exporters. In 2008, RBI offered credit lines of ` 5,000 crore to Export-Import Bank of India (Exim Bank) to support the export sector. Export Credit Refinance Facility RBI offers export credit refinance facility to the scheduled banks under Section 17(3A) of RBI Act 1934. Presently, credit refinance is offered up to 15% of the outstanding export credit. Repo Rate is applicable on the export credit refinance. The monthly payable interest is calculated on daily balances, which gets debited to the account. The maximum duration for repayment is 180 days. One can apply for an export credit refinance of Rupees one lakh and multiple of thereof. Special Refinance Facility (SRF) Special refinance facility was introduced under Section 17(3B) of RBI Act, 1934. It allows scheduled commercial banks (except Regional Rural Banks) to refinance up to 1% of Net Demand and Time Liabilities (NDTL) of each bank. Repo rate under LAF (Liquidity Adjustment Facility) is applicable for this facility. With effect from November 3, 2008, the rate lies at 7.5%.