Open Market Operation by the Reserve Bank of India (RBI) helps in…

CBSE Economics class 12 question and answer | “Open Market Operation by the Reserve Bank of India (RBI) helps in regulating money supply in the economy.”

By
Komal Kohli
-
cbse

“Open Market Operation by the Reserve Bank of India (RBI) helps in regulating money supply in the economy.”

Justify the given statement.

Ans. Justify: Open Market Operations (OMOs) conducted by the Reserve Bank of India (RBI) indeed play a significant role in regulating money supply in the economy. Through OMOs, the RBI buys or sells government securities in the open market.

  1. Buying Securities: When the RBI buys government securities, it injects money into the banking system. Banks receive funds in exchange for the securities sold to the RBI. This increases the reserves of commercial banks, enabling them to lend more to businesses and individuals. The increased lending leads to an expansion of credit and money supply in the economy.

  2. Selling Securities: Conversely, when the RBI sells government securities, it absorbs money from the banking system. Banks pay the RBI for the securities purchased, reducing their reserves. This limits the ability of banks to lend and results in a contraction of credit and money supply in the economy.

By conducting OMOs, the RBI can influence the liquidity conditions in the banking system, thereby regulating the money supply. This tool allows the central bank to implement monetary policy objectives such as controlling inflation, managing interest rates, and stabilizing the economy. Therefore, OMOs are an essential mechanism for the RBI to achieve its monetary policy goals and maintain financial stability.

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