Open market operation
open market operation
Among all monetary policy tools, open market operations, i.e. buying and selling securities by the Bank for its own account in the open market, are the most important and flexible tool of the Bank. The Bank can directly influence the amount of reserves and the level of interbank call-loan market interest rates through such operations.
Open market operation instruments include government securities, and negotiable certificates of deposit (NCDs) issued by the Bank. The Bank can issue or sell those instruments either on an outright basis or under repurchase aggrements to mop up excess liquidity. Conversely, it can purchase those securities to release funds into the market.
The Bank introduced a designated counterparty system to strengthen the efficiency of open market operations. Currently, there are 25 commercial banks and bills finance companies designated as the counterparties of market operations. They are obliged to provide useful and timely market information for the Bank.