Economics • Banking & FinanceMedium
What is the primary operational purpose of Open Market Operations conducted by the Reserve Bank of India?
A. To buy and sell government securities to regulate liquidity conditions in the economy✓ Correct Answer
B. To set the statutory interest rates charged on agricultural term loans by rural banks
C. To manage corporate bond issuances for large public sector undertakings
D. To supervise foreign institutional investments entering domestic capital markets
💡 Solution & Explanation
Open Market Operations involve the direct purchase and sale of government securities by the Reserve Bank of India to modulate rupee liquidity in the banking system. When the central bank purchases securities, it injects liquidity; when it sells securities, it absorbs liquidity. This quantitative tool operates independently of the bank rate mechanism. The statutory authority for conducting open market operations is derived from the Reserve Bank of India Act, 1934.
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