With reference to 'Open Market Operations' (OMO), consider the following statements: 1. It refers to the buying and selling of bonds issued by the Government in the open market by the Central Bank. 2. When RBI buys a Government bond, it decreases the total amount of reserves in the economy. 3. Outright open market operations are permanent in nature. Which of the statements given above is/are correct?

The correct option is 1 and 3 only. Explanation Open Market Operations (OMO) are a quantitative monetary policy tool employed by the Central Bank to manage durable liquidity in the economy through the trading of Government Securities (G-Secs). Statement-wise Analysis: - Statement 1 is Correct: Open Market Operations refer to the buying and selling of government securities (bonds) in the open market by the Central Bank (RBI). This is done to regulate the money supply in the banking system. - Statement 2 is Incorrect: When the RBI buys a Government bond from the market, it pays for the bond by crediting the accounts of commercial banks. This action increases (injects) the total amount of reserves and liquidity in the economy. Conversely, when the RBI sells bonds, it absorbs liquidity, thereby decreasing reserves. - Statement 3 is Correct: Outright Open Market Operations involve the permanent purchase or sale of government securities without an agreement to reverse the transaction. This contrasts with Repurchase Agreements (Repos), which are short-term and involve a commitment to reverse the transaction at a future date. Key Takeaway: OMOs are used to manage liquidity on a durable basis. Buying securities injects liquidity (expansionary policy), while selling securities absorbs liquidity (contractionary policy).

NCERT Class 12 Economics — Chapter 5: Money and Banking

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With reference to 'Open Market Operations' (OMO), consider the following statements:

It refers to the buying and selling of bonds issued by the Government in the open market by the Central Bank.
When RBI buys a Government bond, it decreases the total amount of reserves in the economy.
Outright open market operations are permanent in nature.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B2 only
C1, 2 and 3
D1 and 3 only

Did you get this right?

Solution

The correct option is 1 and 3 only.

Explanation

Open Market Operations (OMO) are a quantitative monetary policy tool employed by the Central Bank to manage durable liquidity in the economy through the trading of Government Securities (G-Secs).

Statement-wise Analysis:

Statement 1 is Correct: Open Market Operations refer to the buying and selling of government securities (bonds) in the open market by the Central Bank (RBI). This is done to regulate the money supply in the banking system.
Statement 2 is Incorrect: When the RBI buys a Government bond from the market, it pays for the bond by crediting the accounts of commercial banks. This action increases (injects) the total amount of reserves and liquidity in the economy. Conversely, when the RBI sells bonds, it absorbs liquidity, thereby decreasing reserves.
Statement 3 is Correct: Outright Open Market Operations involve the permanent purchase or sale of government securities without an agreement to reverse the transaction. This contrasts with Repurchase Agreements (Repos), which are short-term and involve a commitment to reverse the transaction at a future date.

Key Takeaway: OMOs are used to manage liquidity on a durable basis. Buying securities injects liquidity (expansionary policy), while selling securities absorbs liquidity (contractionary policy).

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More from Chapter 5: Money and Banking

If the Reserve Bank of India increases the Bank Rate, what is the likely impact on the economy?

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The 'Currency Deposit Ratio' in the banking system is primarily determined by:

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Consider the following statements regarding the functions of money: 1. Economic exchanges without money are referred to as liquidity exchanges. 2. The principal role of money is to facilitate exchanges by acting as a medium of exchange. 3. In a barter system, the search costs increase as the number of individuals in the economy increases. Which of the statements given above is/are correct?

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With reference to the 'Unit of Account' function of money, consider the following statements: 1. If there is a general increase in the price level, the value of money in terms of commodities increases. 2. It allows the value of all goods and services to be expressed in monetary units. 3. It prevents the calculation of relative prices of different commodities. Which of the statements given above is/are correct?

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Consider the following statements regarding money as a 'Store of Value': 1. Money is an asset that can act as a store of value. 2. The value of money is irrelevant for it to perform the function of a store of value. 3. Storage costs of money are considerably lower compared to perishable commodities like rice. Which of the statements given above is/are correct?

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The correct option is 1 and 3 only.

Explanation

Open Market Operations (OMO) are a quantitative monetary policy tool employed by the Central Bank to manage durable liquidity in the economy through the trading of Government Securities (G-Secs).

Statement-wise Analysis:

Statement 1 is Correct: Open Market Operations refer to the buying and selling of government securities (bonds) in the open market by the Central Bank (RBI). This is done to regulate the money supply in the banking system.
Statement 2 is Incorrect: When the RBI buys a Government bond from the market, it pays for the bond by crediting the accounts of commercial banks. This action increases (injects) the total amount of reserves and liquidity in the economy. Conversely, when the RBI sells bonds, it absorbs liquidity, thereby decreasing reserves.
Statement 3 is Correct: Outright Open Market Operations involve the permanent purchase or sale of government securities without an agreement to reverse the transaction. This contrasts with Repurchase Agreements (Repos), which are short-term and involve a commitment to reverse the transaction at a future date.

Key Takeaway: OMOs are used to manage liquidity on a durable basis. Buying securities injects liquidity (expansionary policy), while selling securities absorbs liquidity (contractionary policy).