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Consider the following statements regarding RBI’s Open Market Operations (OMOs).
  1. OMOs can be used to tame short-term inflation in the economy.
  2. They are to be mandatorily conducted once every year to adjust liquidity in the security markets.
  3. No intermediaries such as commercial banks are involved in OMOs.
Which of the above statements is/are correct?
  • a)
    1 only 
  • b)
    1, 2 
  • c)
    2, 3 
  • d)
    1, 3
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements regarding RBI’s Open Market Op...
OMOs and their Impact

Statement 1: OMOs can be used to tame short-term inflation in the economy.
This statement is correct. Open Market Operations (OMOs) are a monetary policy tool used by the Reserve Bank of India (RBI) to regulate the money supply in the economy. By buying or selling government securities in the open market, RBI can influence the liquidity conditions in the market, which in turn can help control inflation in the short term.

Statement 2: They are to be mandatorily conducted once every year to adjust liquidity in the security markets.
This statement is incorrect. OMOs are not conducted on a fixed schedule. The RBI conducts OMOs based on its assessment of the liquidity conditions in the market and the need to achieve its monetary policy objectives. OMOs can be conducted more frequently than once a year, depending on the prevailing economic conditions.

Statement 3: No intermediaries such as commercial banks are involved in OMOs.
This statement is incorrect. In OMOs, RBI directly interacts with commercial banks and other financial institutions to buy or sell government securities. Commercial banks play a crucial role in the transmission of monetary policy actions through OMOs by participating in these operations.
Therefore, the correct answer is option 'A', as only statement 1 is correct. OMOs are an important tool for the RBI to manage liquidity in the economy and control short-term inflation.
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Consider the following statements regarding RBI’s Open Market Operations (OMOs). OMOs can be used to tame short-term inflation in the economy. They are to be mandatorily conducted once every year to adjust liquidity in the security markets. No intermediaries such as commercial banks are involved in OMOs.Which of the above statements is/are correct?a)1 onlyb)1, 2c)2, 3d)1, 3Correct answer is option 'A'. Can you explain this answer?
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