Definition of Open Market Operation

When the central banking authority makes any kind of purchase and sales of government securities with the aim to regulate credit conditions and money supply, then such type of operation is called open-market operation (OMO). These operations take place continuously. OMO is used to bring stability to the prices of government securities. It has various positive effects.


Firstly, it increases the reserves of commercial banks in this way they may extend their investments and loans. Secondly, it tends to increase the price of government securities which in turn reduces the interest rate. Thirdly, it decreases the rate of interest which brings new business investments.

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