The correct option is Outright operations are permanent, while Repo involves a repurchase agreement..
Explanation
Open Market Operations (OMOs) refer to the buying and selling of government securities by the central bank (RBI) to manage rupee liquidity in the economy. These operations are broadly classified into two categories based on the nature of the transaction: Outright OMOs and Repurchase (Repo) Operations.
Analysis of Options:
- Outright operations involve foreign exchange, while Repo involves government bonds. is incorrect: Both Outright OMOs and Repo operations primarily utilize government securities (G-Secs) as collateral or the asset being traded. Foreign exchange operations are distinct tools used to manage currency volatility.
- Outright operations are permanent, while Repo involves a repurchase agreement. is correct:
- Outright OMOs: These involve the permanent purchase or sale of government securities. When the RBI conducts an outright purchase, it injects durable liquidity into the system without any agreement to reverse the trade. Conversely, an outright sale permanently absorbs liquidity.
- Repo Operations: These involve a repurchase agreement. The central bank lends funds against securities with a mandatory agreement to reverse the transaction (repurchase the securities) at a specific future date and rate. These are used for temporary, short-term liquidity management.
- Outright operations are conducted by commercial banks, while Repo is by RBI. is incorrect: Both operations are conducted by the Reserve Bank of India (RBI) as the monetary authority. Commercial banks act as the counterparties in these transactions.
- Outright operations affect SLR, while Repo affects CRR. is incorrect: While these operations affect the volume of reserves available to banks, they do not directly alter the statutory ratios (SLR or CRR). They are instruments of liquidity adjustment rather than changes to reserve requirement percentages.
Key Takeaway: The primary difference is reversibility: Outright OMOs are permanent transactions used for long-term liquidity management, whereas Repo operations are temporary transactions with a built-in reversal clause for short-term liquidity management.