General Knowledge - Indian Economy - Discussion

An open market operation (OMO) is an activity by a central bank to give (or take) liquidity in its currency to a bank or a group of banks. The central bank can either buy or sell government bonds in the open market or, which is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral.

A central bank uses OMO as the primary means of implementing monetary policy. The usual aim of open market operations is - asides from supplying commercial banks with liquidity and sometimes taking surplus liquidity from commercial banks - to manipulate the short-term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply, in effect expanding money or contracting the money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation.

The usual aim of open market operations is - asides from supplying commercial banks with liquidity and sometimes taking surplus liquidity from commercial banks - to manipulate the short-term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply, in effect expanding money or contracting the money supply.

Open Market operation by RBI means to sell or buy securities in open market with a view to expand or contract the credit in the country. Thus right answer should be (B).

Open market is that where gov guilt edge securities are sold like commercial paper etc like these. So its answer is B to sell securities in open market.

@Surinder.

I think the correct answer is A as the RBI here is following expansionist policy. i.e. it wants to inject money into the market.

What is open market?