Which of the following quantitative instruments of monetary policy involves the Reserve Bank of India buying or selling government securities to regulate system liquidity?

💡 Solution & Explanation

Open Market Operations refer to the outright purchase or sale of government securities by the Reserve Bank of India to expand or contract the volume of liquidity in the banking system. When the central bank sells securities, commercial banks pay for them by transferring funds from their reserves to the central bank, thereby tightening liquidity and raising interest rates. Conversely, buying securities injects liquidity into the banking system, lowering short-term borrowing costs and encouraging credit expansion. These operations are conducted through the Negotiated Dealing System-Order Matching platform. A related monetary tool is the Repo Rate, which involves repurchase agreements rather than outright security transactions.