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In the context of Indian economy, 'Open Market Operations' refers to:
- a)Borrowing by scheduled banks from the RBI
- b)Lending by commercial banks to industry and trade
- c)Purchase and sale of government securities by the RBI
- d)None of the above
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
In the context of Indian economy, Open Market Operations refers to:a)B...
RBI Governor has announced Government Securities Acquisition Programme (G-SAP), through which it will purchase government securities worth Rs 1 lakh crore in the first quarter of FY22.
- In the backdrop of the government's elevated borrowing for this year, which the RBI has to ensure goes through without causing disruption, G-SAP aims to provide more comfort to the bond market.
- Market participants always wanted to know the RBI's Open Market Operations (OMO) purchase calendar, and the RBI has now provided that to the market through this announcement on GSAP.
- it will provide certainty to the bond market participants with regard to RBI's commitment of support to the bond market in FY22.
- This structured program's announcement will help reduce the spread between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY22.
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In the context of Indian economy, Open Market Operations refers to:a)B...
Open Market Operations (OMO) in the Indian Economy
Open Market Operations (OMO) refers to the buying and selling of government securities by the Reserve Bank of India (RBI) in the open market to control the money supply in the economy. It is one of the monetary policy tools used by the central bank to regulate inflation and liquidity in the financial system. OMOs are conducted on a regular basis to manage the cash reserves of banks, influence interest rates, and stabilize the economy.
Explanation of the Correct Answer: Option C
The correct answer to the question is option C, which states that Open Market Operations refer to the purchase and sale of government securities by the RBI. This answer is correct because OMOs involve the buying and selling of government securities, such as treasury bills and government bonds, by the central bank in the open market.
Other Options Explained:
a) Borrowing by scheduled banks from the RBI: This option is incorrect as it refers to the repo rate, which is the interest rate at which banks borrow money from the RBI. While the repo rate is an important tool used by the RBI to regulate liquidity in the banking system, it is not specifically related to Open Market Operations.
b) Lending by commercial banks to industry and trade: This option is incorrect as it refers to the loan disbursement activities of commercial banks. While lending by commercial banks is an important component of the economy, it is not directly related to Open Market Operations.
d) None of the above: This option is incorrect as the correct answer is option C, which states that Open Market Operations involve the purchase and sale of government securities by the RBI.
Conclusion
Open Market Operations play a crucial role in the Indian economy by allowing the central bank to regulate liquidity, manage interest rates, and stabilize the financial system. By buying government securities, the RBI injects liquidity into the system, whereas selling government securities absorbs liquidity. These operations are essential tools used by the central bank to maintain price stability and promote economic growth.
Open Market Operations (OMO) refers to the buying and selling of government securities by the Reserve Bank of India (RBI) in the open market to control the money supply in the economy. It is one of the monetary policy tools used by the central bank to regulate inflation and liquidity in the financial system. OMOs are conducted on a regular basis to manage the cash reserves of banks, influence interest rates, and stabilize the economy.
Explanation of the Correct Answer: Option C
The correct answer to the question is option C, which states that Open Market Operations refer to the purchase and sale of government securities by the RBI. This answer is correct because OMOs involve the buying and selling of government securities, such as treasury bills and government bonds, by the central bank in the open market.
Other Options Explained:
a) Borrowing by scheduled banks from the RBI: This option is incorrect as it refers to the repo rate, which is the interest rate at which banks borrow money from the RBI. While the repo rate is an important tool used by the RBI to regulate liquidity in the banking system, it is not specifically related to Open Market Operations.
b) Lending by commercial banks to industry and trade: This option is incorrect as it refers to the loan disbursement activities of commercial banks. While lending by commercial banks is an important component of the economy, it is not directly related to Open Market Operations.
d) None of the above: This option is incorrect as the correct answer is option C, which states that Open Market Operations involve the purchase and sale of government securities by the RBI.
Conclusion
Open Market Operations play a crucial role in the Indian economy by allowing the central bank to regulate liquidity, manage interest rates, and stabilize the financial system. By buying government securities, the RBI injects liquidity into the system, whereas selling government securities absorbs liquidity. These operations are essential tools used by the central bank to maintain price stability and promote economic growth.
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