Question

Open market operations by the Reserve Bank of India (RBI) help in regulating money supply in the economy. Justify the given statement with valid arguments.

Hint:

RBI buys securities to increase money supply and sells securities to reduce liquidity, helping in monetary regulation.

Answer 1

Open Market Operations (OMO) refer to the buying and selling of government securities (bonds, treasury bills, etc.) in the open market by the Reserve Bank of India (RBI) to regulate money supply and liquidity in the economy. How Open Market Operations Help Regulate Money Supply: 1. When RBI Buys Government Securities (Expansionary Policy):
- RBI purchases securities from banks and the public.
- This injects money into the banking system, increasing liquidity and encouraging lending and investment.
- This is used to stimulate economic growth during a recession. 2. When RBI Sells Government Securities (Contractionary Policy):
- RBI sells government securities to banks and the public.
- This absorbs excess liquidity, reducing money supply and curbing inflationary pressures.
- This is used to control inflation in an overheated economy. Conclusion: Open Market Operations (OMO) are an essential tool for controlling liquidity and stabilizing economic conditions in an economy.