Expansionist Open Market Operations Policy

Under an expansionist open market operations policy, the Reserve Bank of India (RBI) aims to increase the money supply in the economy. This policy is typically used to stimulate economic growth and promote credit expansion. The correct answer to the question is option 'C', which states that the RBI will offer commercial banks more credit in the open market.

Explanation:

1. Open Market Operations (OMO)

Open market operations refer to the buying and selling of government securities by the central bank in the open market. These transactions are conducted with the aim of influencing the money supply and interest rates in the economy. When the RBI buys government securities, it injects liquidity into the market, thereby increasing the money supply. Conversely, when it sells government securities, it absorbs liquidity from the market, leading to a decrease in the money supply.

2. Expansionist Monetary Policy

An expansionist monetary policy is pursued when there is a need to stimulate economic activity and encourage credit expansion. This policy is typically implemented during periods of low economic growth or recession. By adopting an expansionist open market operations policy, the RBI aims to increase the availability of credit in the economy, which in turn promotes investment, consumption, and overall economic activity.

3. Offering More Credit in the Open Market

Under an expansionist open market operations policy, the RBI offers commercial banks more credit in the open market. This is done by purchasing government securities from commercial banks, which increases their reserves. When commercial banks have more reserves, they are able to extend more credit to businesses and individuals. This increased availability of credit encourages borrowing and spending, thereby boosting economic activity.

Benefits of Offering More Credit

- Increased liquidity: By offering more credit to commercial banks, the RBI increases the liquidity in the banking system, making it easier for banks to meet the credit needs of borrowers.

- Lower interest rates: The increased availability of credit leads to competition among banks, resulting in lower interest rates. This makes borrowing more affordable and encourages investment and consumption.

- Stimulated economic growth: The expansion of credit stimulates economic growth by promoting investment, consumption, and overall economic activity.

Conclusion

In summary, when the RBI adopts an expansionist open market operations policy, it aims to increase the availability of credit in the economy. By offering commercial banks more credit in the open market, the RBI stimulates economic growth, lowers interest rates, and promotes investment and consumption.