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How does the Reserve Bank of India control inflation through Open Market Operations?
- a)By lowering the bank rate
- b)By increasing public deposits
- c)By selling government securities to absorb excess money from the market
- d)By increasing the Cash Reserve Ratio
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
How does the Reserve Bank of India control inflation through Open Mark...
To control inflation, the RBI sells government securities, which reduces the amount of money circulating in the economy and helps stabilize prices.
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How does the Reserve Bank of India control inflation through Open Mark...
Understanding Open Market Operations
Open Market Operations (OMO) are a key tool used by the Reserve Bank of India (RBI) to control inflation and manage the money supply in the economy. By buying or selling government securities, the RBI influences the liquidity available in the banking system.
How Selling Government Securities Controls Inflation
When the RBI sells government securities, it effectively withdraws money from circulation. Here’s how this process works:
Conclusion
In summary, by selling government securities through Open Market Operations, the RBI effectively absorbs excess money from the market, helping to control inflation. This strategy is crucial for maintaining economic stability and ensuring sustainable growth.
Open Market Operations (OMO) are a key tool used by the Reserve Bank of India (RBI) to control inflation and manage the money supply in the economy. By buying or selling government securities, the RBI influences the liquidity available in the banking system.
How Selling Government Securities Controls Inflation
When the RBI sells government securities, it effectively withdraws money from circulation. Here’s how this process works:
- Absorption of Excess Money: By selling these securities, the RBI takes money out of the hands of banks and financial institutions, thereby reducing the overall money supply in the market.
- Impact on Inflation: With less money available in the economy, consumer spending tends to decrease. This helps in controlling demand-pull inflation, where increased demand leads to rising prices.
- Raising Interest Rates: As liquidity decreases, banks may raise interest rates to attract deposits. Higher interest rates discourage borrowing and spending, further helping to control inflation.
- Market Confidence: Selling government securities can also signal to the market that the RBI is serious about controlling inflation, thus maintaining investor confidence.
Conclusion
In summary, by selling government securities through Open Market Operations, the RBI effectively absorbs excess money from the market, helping to control inflation. This strategy is crucial for maintaining economic stability and ensuring sustainable growth.
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