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Ans.
Open Market Operation (OMO) is very effective and popular instrument of the monetary policy. The open market operation refers to the purchase and/or sale of short term and long term securities by the RBI in the open market.
The OMO is used to wipe out shortage of money in the money market, to influence the term and structure of the interest rate and to stabilize the market for government securities, etc. If the RBI sells securities in an open market, commercial banks and private individuals buy it. This reduces the existing money supply as money gets transferred from commercial banks to the RBI. When the RBI buys the securities from commercial banks in the open market, commercial banks sell it and get back the money they had invested in them. By Open Market Operation (OMO) the stock of money in the economy increases. This way when the RBI enters in the OMO transactions, the actual stock of money gets changed.