Govt clarifies on OMO support from RBI
OMO NOT TO BE CONFUSED WITH MONETIZATION
Attention of the Government has been drawn to reports in a section of media where an impression is sought to be created that the Government is resorting to partial monetization of its deficit. It seems that the Open Market Operations (OMO) of the RBI are being confused with monetization.
Government clarifies that Open Market Operations of RBI are a regular tool for effective liquidity management. These operations are conducted as warranted by the evolving monetary and financial market conditions. The RBI can either buy or sell Government securities in the secondary market as part of its OMO. In other words, these are entirely secondary market operations. The amount of OMO and the decision to buy or sell Government securities in the secondary market are determined by the prevailing liquidity conditions in the market.
It may be further noted that as per the FRBM Act 2003, RBI could subscribe to primary issues of Central Government securities only up to 31st March 2006. According to Section 5 (1) of the Act, the Central Government shall not borrow from the RBI except by way of Ways and Means advances to meet temporary cash requirements. There is of course a provision in the said Act that on grounds of national security or national calamity or such other exceptional circumstances as the Central Government may specify, the RBI could subscribe after 1.4.2006 to primary issues of Central Government securities and further such grounds shall be placed by the Government before both Houses of Parliament.
At present, notwithstanding the 6.8 % fiscal deficit projected in BE 2009-10, the Government does not propose to invoke the above provisions of the FRBM Act for facilitating RBI participation in the primary market for Government securities.
BSC/BY/GN-312/09
(Release ID :50032)