Question

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

Answer 1

The term 'open market operations' describes the central bank's open market purchases and sales of securities. The central bank buys securities to expand the money supply (as in deflation), and securities are sold off to reduce the money supply (as during inflation). By purchasing the assets, the central bank increases its ability to issue credit for commercial banks by releasing liquidity. Selling the assets reduces the economy of liquidity, which lowers the commercial banks' ability to provide credit.