"Open Market Operation by the Reserve Bank of India (RBI) helps in regulating money supply in the economy." Justify the given statement.

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

OMOs are effective because:
1. They directly affect bank reserves
2. They work through market mechanisms
3. They can be targeted and flexible
4. They have quick transmission effect