To properly determine whether the water level in a reservoir is rising or falling, one must observe both the "faucet" and the "floodgate" together. Without viewing the complete picture, it is difficult to accurately assess the water volume. The same applies to open market operations^[1]. The Bank of Korea's RP purchases^[2] are an instrument akin to a "faucet" supplying water to the reservoir, while conversely, Monetary Stabilization Bonds and RP sales are instruments akin to a massive "floodgate" draining water out. Recently, some have raised claims that the Bank of Korea is supplying excessive liquidity by simply adding up the volume of RP purchases, which is tantamount to focusing only on the small "faucet" while overlooking the massive "floodgate." In what follows, we examine the direction in which the Bank of Korea's open market operations are being conducted and seek to correct the errors regarding RP purchases.

Figure 1. Absorption and supply of reserves through Open Market Operations

The Core of Open Market Operations:
Managing Short-Term Interest Rates Through Reserve Balance Adjustment

Banks are obligated to maintain a certain level of reserve balances (hereinafter "reserves") at the Bank of Korea to prepare for deposit withdrawals and settlement fund demands (required reserve balances, hereinafter "required reserves"). However, the actual reserve that banks deposit at the Bank of Korea fluctuate constantly depending on government revenues and expenditures, the supply of Korean won resulting from the Bank of Korea's foreign exchange transactions, currency issuance, and other factors. When reserve balances fall short of required reserves, banks compete to borrow funds, putting upward pressure on the call rate. Conversely, when reserve balances exceed required reserves, banks seek to lend out surplus funds, putting downward pressure on the call rate[3]. Through open market operations, the Bank of Korea adjusts the total reserve balances of financial institutions to the level of required reserves, thereby guiding the call rate to form stably around the Base Rate set by the Monetary Policy Board. The call rate formed through this process then spreads to other interest rates through transactions in financial markets. Through such open market operations, the Bank of Korea ensures that monetary policy transmits throughout the financial markets. [Interest Rate-Oriented Monetary Policy Operational Framework]

Figure 2. Base rate and Call rate

Source Bank of Korea

Figure 3. Achieving Balance Between Reserve Demand and Supply Through Open Market Operations

Adjusting Total Reserve Balances Using Various Tools, from Monetary Stabilization Bonds to RP Transactions

The Bank of Korea adjusts total reserve balances by utilizing various tools including the issuance of Monetary Stabilization Bonds, RP transactions, and deposits in Monetary Stabilization Accounts. The issuance of Monetary Stabilization Bonds, RP sales, and deposits in Monetary Stabilization Accounts are tools for absorbing reserves, while RP purchases are a tool for supplying reserves. The Bank of Korea absorbs structurally surplus reserves by issuing Monetary Stabilization Bonds with relatively longer maturities, and addresses temporary imbalances in reserve levels through short-maturity RP transactions—either absorbing reserves (RP sales) or supplying reserves (RP purchases).

Table 1. Types and Maturities of Open Market Operation Instruments

Note ^1. Based on standard maturities applied in regular auctions as of January 2026

RP Purchase Volume Should Be Assessed by "Average Outstanding Balance," Not "Cumulative Sum“

Recently, some have claimed that "the Bank of Korea supplied a massive 488 trillion won in liquidity through RP purchases last year." However, this grossly exaggerates the reserve supply effect by simply adding up RP purchase amounts cumulatively, and stems from a misunderstanding of the RP transaction mechanism. RP purchases have a maturity of only two weeks, and when they mature, the reverse transaction automatically occurs and the funds are recovered. Therefore, simply summing the individual transaction amounts of short-maturity RP purchases results in a figure for the effect on total reserves that is vastly larger than reality. For instance, if someone repeatedly borrows and repays 100,000 won with a one-week maturity over the course of a year, they would have had 100,000 won in their wallet, not 5.2 million won (100,000 won × 52 weeks). Accordingly, the appropriate way to assess the Bank of Korea's RP purchase volume is by average outstanding balance rather than by simply accumulating transaction amounts, and last year's average outstanding balance of RP purchases was merely 15.9 trillion won. When reserve supply volume is overestimated through such a flawed approach, it can create a misperception that liquidity supply is excessive and generate unnecessary anxiety in the market.

Figure 4. Repurchase Agreement Transaction Flow

The Direction of the Bank of Korea's Open Market Operations: A Reserve "Absorption" Stance

Looking at the operating volume (average outstanding balance) of other instruments, last year the Bank of Korea absorbed a total of 107.9 trillion won in reserves through the issuance of 105.7 trillion won in Monetary Stabilization Bonds, 1.8 trillion won in RP sales, and 0.5 trillion won in Monetary Stabilization Account deposits. In other words, the amount of water released from the reservoir through the floodgate was far greater than the amount let in through the faucet. In Korea's case, total reserve balances structurally exceed required reserves due to the process of holding and managing foreign exchange reserves, so open market operations are conducted in a direction that absorbs this excess portion to prevent the call rate from falling below the Base Rate.

Meanwhile, the increase in RP purchase volume last year was mainly attributable to the introduction of two-way RP transactions^[4] in response to increased short-term volatility in reserves^[5]. While maintaining a structural reserve absorption stance, the Bank of Korea regularized RP purchases to respond flexibly to temporary reserve fluctuations. The increase in RP purchase volume is the result of fine-tuning reserve levels based on this institutional reform, and does not represent a change in the underlying absorption trend.

Figure 5. Size of Reserve Absorption and Supply Through Open Market Operations¹

Note ^1.Based on average outstanding balances for 2025

Source Bank of Korea

It Is Inappropriate to Claim that "The Bank of Korea Excessively Supplies Liquidity" by Simply Adding Up RP Purchases

The Bank of Korea operates by combining various instruments, comprehensively considering factors affecting total reserve balances and money market conditions, and the overall policy effect needs to be understood as the result of these instruments working together. In this regard, ignoring the fact that open market operations maintain an overall absorption stance and claiming that the Bank of Korea excessively supplies liquidity based on the overestimated figures for the specific instrument of RP purchases is a distortion of the facts. Such irrational claims not only undermine confidence in monetary policy but also have significant negative impacts, such as stimulating excessive anxiety regarding the exchange rate and other matters.

To emphasize once again, open market operations are not about raising or lowering the water level (total reserve balances) above or below the appropriate level, but rather a process of maintaining the water level at an appropriate level. RP purchases in this process are simply a flexible adjustment of the "faucet" to properly manage the water level in response to temporary increases in financial market volatility; they are by no means about filling the reservoir to overflowing.

• [1] Open Market Operations refer to monetary policy instruments through which a central bank buys and sells securities or issues bonds in financial markets to influence the level of banks' reserve balances (reserves) and short-term interest rates.
• [2] RP transactions are bond trading arrangements in which the buyer purchases bonds held by the seller and pays for them at the time of the transaction, but agrees to resell those bonds at the end of the transaction period. Economically, this can be interpreted as lending and borrowing of funds. In the Bank of Korea's RP purchases, the Bank of Korea is the buyer and financial institutions are the sellers.
• [3] The call rate refers to the interest rate at which financial institutions borrow from or lend to each other on an short-term basis in the call market to adjust temporary fund surpluses and shortages.
• [4] Amid changes in capital flow patterns, including stagnation or decline in structural reserve supply through the external sector, private sector demand for currency has increased due to economic expansion, and the influence of non-bank financial institutions has grown in domestic financial markets. In consideration of these changes in financial conditions, the Bank of Korea held a joint policy symposium with the Korean Finance Association on the theme of "Operational Challenges and Implications of Korea's Monetary Policy Instruments" (April 30, 2025) and announced a reform plan for the open market operations system (June 26, 2025). (For more details, see the link)
• [5] As RP purchases were implemented regularly on a weekly basis, the number of purchases increased (from 17 times in 2024 to 43 times in 2025), and the purchase volume also expanded (from 2.6 trillion won in 2024 to 15.9 trillion won in 2025, on an average outstanding balance basis) in response to reduced reserve supply from the external sector, including the conclusion of foreign exchange swaps with the National Pension Service (because the Bank of Korea supplies US dollars to the National Pension Service and receives won, won reserve balances are absorbed until maturity).