Question

'Open Market Operation by the Reserve Bank of India (RBI) helps in regulating money supply in the economy." Justify the given statement.

Hint:

OMO is a vital tool for controlling inflation and managing the liquidity in the economy by regulating the money supply.

Answer 1

Open Market Operations (OMO) are one of the key tools used by the Reserve Bank of India (RBI) to regulate the money supply in the economy.
- Buying securities (OMO Purchase):
When the RBI buys government securities from the market, it injects money into the banking system. This increases the reserves of commercial banks, encouraging them to lend more, thereby increasing the money supply. 
- Selling securities (OMO Sale): 
When the RBI sells government securities, it pulls money out of the banking system. This reduces the reserves of commercial banks, restricting their lending capacity and thereby decreasing the money supply. 
- Through OMOs, the RBI can control liquidity in the economy, manage inflation, and stabilize the financial system. 
Conclusion: Open Market Operations are an effective tool for managing the money supply in the economy, influencing interest rates, and ensuring economic stability.