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).

With reference to 'Open Market… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 5: Money and Banking

mcqmedium

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?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 7

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).

Your note

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