Question

"Define 'Open Market Operations'."

Hint:

OMOs are a key tool for central banks to manage the money supply and influence short-term interest rates, which in turn affect economic activity.

Answer 1

Open Market Operations (OMO) refer to the buying and selling of government securities in the open market by a country's central bank, such as the Reserve Bank of India (RBI), to regulate the money supply and control interest rates in the economy. When the central bank buys government securities, it injects liquidity into the banking system, thus increasing the money supply. Conversely, when the central bank sells government securities, it absorbs liquidity from the banking system, reducing the money supply. OMOs are an important tool of monetary policy used to achieve objectives such as controlling inflation, stabilizing the currency, and maintaining overall economic stability.