The RBI can decrease the money supply in the market by:

a)
Selling government securities

b)
buying government securities

c)
borrowing money from commercial banks

d)
none of the above

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

Question

The RBI can decrease the money supply in the market by:

a)
Selling government securities
b)
buying government securities
c)
borrowing money from commercial banks
d)
none of the above

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

Answer

RBI controls money supply in the market through va

rious tools and measures.CRR - Cash Reserve Ratio is the proportion of

Answer

When RBI sells securities it will soak liquidity from the people and hence money supply will decrease.

Answer

Decreasing Money Supply through Selling Government Securities

Selling government securities is one of the tools used by the Reserve Bank of India (RBI) to decrease the money supply in the market. This action helps in controlling inflation and stabilizing the economy. Let's understand how this process works:

1. Role of the RBI:
The RBI is the central banking institution that regulates the monetary policy in India. It aims to maintain price stability, control inflation, and support economic growth. One of the ways it manages the money supply is through open market operations (OMOs).

2. Open Market Operations (OMOs):
OMOs are the buying and selling of government securities in the open market by the central bank. These securities include treasury bills, government bonds, and other debt instruments issued by the government. The RBI uses OMOs to influence the liquidity position in the economy.

3. Decreasing Money Supply:
When the RBI sells government securities in the open market, it absorbs excess money from the market. This action reduces the money supply available to the public and banks. Here's how it works:

- The RBI announces the sale of government securities in the open market.
- Interested buyers, such as banks, financial institutions, and individuals, participate in the auction conducted by the RBI.
- The buyers purchase the government securities by paying the specified amount to the RBI.
- In return, the buyers receive the government securities, which they can hold until maturity or sell them in the secondary market.
- The money paid by the buyers to the RBI is deducted from their bank reserves, thereby reducing the available money supply in the market.
- As a result, the excess liquidity in the market decreases, leading to a decrease in the money supply.

4. Impact on Economy:
Decreasing the money supply has several effects on the economy:

- It helps in controlling inflation by reducing the purchasing power of individuals and businesses.
- It stabilizes interest rates as the reduced money supply leads to increased demand for credit, which in turn causes interest rates to rise.
- It encourages savings as individuals have limited access to money, promoting a culture of saving and investment.
- It helps in maintaining macroeconomic stability and supports the overall economic growth of the country.

Overall, selling government securities by the RBI is an effective tool to decrease the money supply in the market and achieve the desired economic objectives.

Answer

By selling securities RBI can decrease money supply in market. Because by selling securities money comes in RBI and only certificate of those securities goes in market. In this way RBI can decrease money supply in market.

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