Economics • Banking & FinanceMedium
Analyze the operational mechanism of 'Open Market Operations' conducted by the Reserve Bank of India. What is the immediate effect of selling government securities in the open market?
A. An increase in commercial bank lending capacity and lower market interest rates
B. A contraction in systemic liquidity and withdrawal of reserve money from the banking system✓ Correct Answer
C. An immediate depreciation of the domestic currency against major international reserve currencies
D. A permanent reduction in statutory liquidity ratio requirements for scheduled banks
💡 Solution & Explanation
When the Reserve Bank of India sells government securities, commercial banks and financial institutions purchase them by paying funds from their reserves, directly reducing systemic liquidity. Buying securities injects liquidity into the banking system to ease credit conditions. These operations serve as a flexible tool for fine tuning daily money market liquidity. Statutory liquidity ratio is a regulatory mandate distinct from active open market security transactions.
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