Punjab, Sept. 22 -- The Reserve Bank sold Rs 25,000 crore of government securities through an open market operation, draining that much liquidity out of the banking system. It is a small, technical action that says something about where policy is pointing.
What an OMO sale does
The RBI sells bonds it holds; banks pay for them with cash. The cash leaves the system and the bonds enter bank balance sheets. Liquidity falls.
It is the mirror image of the OMO purchases the central bank ran when it wanted money cheap and plentiful. Same instrument, opposite direction.
Why now
Excess liquidity pushes overnight rates below the repo rate. When that happens, the policy rate stops being the rate that actually governs borrowing costs, and the centr...