"Open market operations by Reserve Bank of India (RBI) help in regulating money supply in the economy." Justify the given statement with valid arguments. Elaborate the "Bankers' Bank" function of the Central Bank of a nation.

Question

Accepted Answer

Open Market Operations help in regulating money supply:

Justification:
1. Sale of securities by RBI:
- Banks and public buy securities
- Money flows to RBI
- Banks' reserves decrease
- Credit creation capacity reduces
- Money supply decreases

2. Purchase of securities by RBI:
- RBI buys securities from banks/public
- Money flows to banks
- Banks' reserves increase
- Credit creation capacity increases
- Money supply increases

Bankers' Bank function of RBI:
1. Holds reserves of commercial banks
2. Provides lending facility (Repo Rate)
3. Acts as lender of last resort
4. Clears inter-bank transactions
5. Supervises and regulates commercial banks