RBI conducts large-scale OMO purchases of government

Solution

OMO purchase injects liquidity → interest rates soften due to higher supply of funds. • When the Reserve Bank of India (RBI) conducts large-scale Open Market Operations (OMO) purchases of government securities, it buys these securities from commercial banks and financial institutions, paying for them by crediting their reserve accounts. • Impact on Liquidity: This action infuses a significant amount of cash into the banking system, directly increasing liquidity. • Impact on Interest Rates: The increased liquidity means banks have more funds available to lend, which reduces the cost of funds and causes short-term interest rates to fall