Economics • Banking & FinanceHard
Analyze the operational mechanics of Open Market Operations conducted by the Reserve Bank of India. What is the immediate monetary impact when the central bank sells government securities to commercial banks?
A. Liquidity is drained from the banking system, exerting upward pressure on short-term interest rates✓ Correct Answer
B. Commercial bank reserves expand, stimulating rapid credit creation for retail borrowers
C. The statutory liquidity ratio requirement is automatically reduced for public sector banks
D. Foreign exchange reserves increase through direct monetization of fiscal deficits
💡 Solution & Explanation
When the Reserve Bank of India sells government securities in the open market, commercial banks pay for these instruments by debiting their reserve accounts with the central bank. This transaction contracts the monetary base and reduces systemic liquidity, pushing market interest rates higher to cool inflationary pressures. Conversely, purchasing securities injects liquidity into the economy.
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