Consider the following statements regarding the tools of monetary policy used by RBI:1. Liquidity Adjustment Facility (LAF) helps the RBI to transmit interest rate signals to the market.2. In Open market Operations, central bank purchases or sells bonds in the open market in order to regulate money supply in the economy.Which of the above statements is/are incorrect?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'D'. Can you explain this answer?

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Consider the following statements regarding the tools of monetary policy used by RBI:
1. Liquidity Adjustment Facility (LAF) helps the RBI to transmit interest rate signals to the market.
2. In Open market Operations, central bank purchases or sells bonds in the open market in order to regulate money supply in the economy.
Which of the above statements is/are incorrect?

a)
1 only
b)
2 only
c)
Both 1 and 2
d)
Neither 1 nor 2

Correct answer is option 'D'. Can you explain this answer?

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Consider the following statements regarding the tools of monetary poli...

• Both statements are correct
Monetary Policy Tools
Liquidity Adjustment Facility (LAF)
• The LAF is the key element in the monetary policy operating framework of the RBI (introduced in June 2000). On a daily basis, the RBI stands ready to lend to or borrow money from the banking system, as per the need of the time, at fixed interest rates (repo and reverse repo rates).
• Together with moderating the fundmismatches of the banks, LAF operations help the RBI to effectively transmit interest rate signals to the market.
Open Market Operations (OMOs)
• OMOs are conducted by the RBI via the sale/purchase of government securities (G-Sec) to/from the market with the primary aim of modulating rupee liquidity conditions in the market.
• OMOs are an effective quantitative policy tool in the armory of the RBI but are constrained by the stock of government securities available with it at a point in time.

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Consider the following statements regarding the tools of monetary policy used by RBI:1. Liquidity Adjustment Facility (LAF) helps the RBI to transmit interest rate signals to the market.2. In Open market Operations, central bank purchases or sells bonds in the open market in order to regulate money supply in the economy.Which of the above statements is/are incorrect?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'D'. Can you explain this answer?

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