RBI puts in place Special Market Operations

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Mumbai, May 30 (UNI) The Reserve Bank of India (RBI) has put in place Special Market Operations (SMO) on an ad hoc basis so as to minimise potential adverse consequences for financial markets in a transparent manner.

Accordingly, it has decided to conduct open market operations (outright or repo at the discretion of the Reserve Bank) in the secondary market through designated banks in oil bonds held by public sector oil marketing companies in their own accounts subject to an overall ceiling of Rs 1,000 crore on any single day, provided equivalent foreign exchange through designated banks at market exchange rates to the oil companies, a RBI release said here today.

Consequently, liquidity and other related issues currently faced by public sector oil companies, one of the important participants in the money, foreign exchange, credit and bond markets, arising from the unprecedented escalation in international crude prices have systemic implications for the smooth functioning of financial markets and for overall financial stability.

The SMOs would constitute only a fraction of the total turnover in the money and foreign exchange markets but are intended to have the impact of reducing volatility. Further, these operations would improve the access of public sector oil companies to domestic liquidity and alleviate the lumpy demand in the foreign exchange market in the current extraordinary situation.

It may be recalled that on earlier occasions of market stress, the Reserve Bank had given assurances of domestic as well as foreign currency liquidity support to financial markets, including direct support to specific entities.

These measures are ad hoc, temporary in nature and will be reviewed on a continuous basis, the release added.

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