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Consider the following statements regarding the open market operations of the RBI.
1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.
2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply
3. RBI cannot sell bonds to the private institutions
Which of these statements are correct?
- a)1 Only
- b)2 Only
- c)3 Only
- d)1 and 2 Only
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Consider the following statements regarding the open market operation...
- Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government.
- When RBI buys a Government bond in the open market, it pays for it by giving a cheque. This cheque increases the total amount of reserves in the economy and thus increases the money supply. Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply.
Most Upvoted Answer
Consider the following statements regarding the open market operation...
Explanation:
Statement 1: When RBI buys a Government bond in the open market, it pays for it by giving a cheque.
This statement is correct. When the RBI conducts open market operations (OMOs) to buy government bonds, it pays for the bonds by issuing a cheque to the seller. This is how the RBI injects liquidity into the market.
Statement 2: Selling of a bond by RBI leads to an increase in the quantity of reserves and hence the money supply.
This statement is correct. When the RBI sells government bonds in the open market, it essentially absorbs liquidity from the market. By selling bonds, the RBI reduces the reserves of banks and other financial institutions, which in turn reduces their ability to lend. This leads to a decrease in the money supply.
Statement 3: RBI cannot sell bonds to private institutions.
This statement is incorrect. The RBI can sell bonds to private institutions. In fact, the RBI conducts open market operations with various participants, including banks, primary dealers, and other financial institutions. The objective of OMOs is to manage liquidity in the market and influence interest rates. By buying or selling bonds to these institutions, the RBI can either inject or absorb liquidity, thereby affecting the money supply.
Therefore, the correct statements are 1 and 2 only.
Statement 1: When RBI buys a Government bond in the open market, it pays for it by giving a cheque.
This statement is correct. When the RBI conducts open market operations (OMOs) to buy government bonds, it pays for the bonds by issuing a cheque to the seller. This is how the RBI injects liquidity into the market.
Statement 2: Selling of a bond by RBI leads to an increase in the quantity of reserves and hence the money supply.
This statement is correct. When the RBI sells government bonds in the open market, it essentially absorbs liquidity from the market. By selling bonds, the RBI reduces the reserves of banks and other financial institutions, which in turn reduces their ability to lend. This leads to a decrease in the money supply.
Statement 3: RBI cannot sell bonds to private institutions.
This statement is incorrect. The RBI can sell bonds to private institutions. In fact, the RBI conducts open market operations with various participants, including banks, primary dealers, and other financial institutions. The objective of OMOs is to manage liquidity in the market and influence interest rates. By buying or selling bonds to these institutions, the RBI can either inject or absorb liquidity, thereby affecting the money supply.
Therefore, the correct statements are 1 and 2 only.
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Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer?
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Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer?.
Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements regarding the open market operations of the RBI. 1. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.2. Selling of a bond by RBI leads to increase in quantity of reserves and hence the money supply3. RBI cannot sell bonds to the private institutionsWhich of these statements are correct?a) 1 Onlyb) 2 Onlyc) 3 Onlyd) 1 and 2 OnlyCorrect answer is option 'A'. Can you explain this answer?.
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