Q. In the context of Indian economy, ‘Open Market Operations’ refers to

  • borrowing by scheduled banks from the RBI
  • lending by commercial banks to industry and trade
  • purchase and sale of government securities by the RBI
  • None of the above

Answer: (c) purchase and sale of government securities by the RBI

Open Market Operations:
  • Open Market Operations (OMOs) are market operations conducted by RBI by way of sale/ purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
  • If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
  • Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
  • It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
Operation Twist:
  • The simultaneous buying and selling of Government securities through Open Market Operations of nearly Rs.10000 crores each is called Operation Twist.
  • In this mechanism, the RBI sold the short term G-secs and bought long term G-secs from the market.
  • This will increase the price of long term G-secs in the market due to its demand and reduce its yield.