RAS question
Open Market Operations (OMO) by RBI involve:
Correct answer: (D) Buying and selling of government securities in the open market.
Open Market Operations by the RBI involve buying and selling government securities in the open market to inject or absorb liquidity in the banking system.
Explanation
Open Market Operations are not about printing currency, changing reserve requirements or altering the repo rate. The RBI's own guide describes OMO as buying and selling government securities in the open market to inject liquidity into, or absorb durable liquidity from, the banking system. This matches the core monetary-policy logic: when the RBI buys government securities, money flows into the banking system and liquidity rises; when it sells them, money is pulled out and liquidity falls. That is why the correct option is the buying and selling of government securities in the open market. OMO is therefore a quantitative monetary-policy tool focused on the amount of liquidity, not the announced policy rate itself.
Why the other options are wrong
- (A) Printing new currency notes is a currency-issuance action, whereas OMO specifically operates through transactions in government securities.
- (B) Changing CRR alters banks' reserve requirement and is a separate monetary-policy tool, not an open-market purchase or sale of securities.
- (C) Changing the repo rate changes the policy rate under the liquidity framework, while OMO works through outright buying or selling of government securities.
Concept
This tests Indian Economy's monetary-policy instruments, especially the distinction between liquidity operations, reserve requirements and policy-rate changes. RAS questions often use this concept to check whether aspirants can identify the exact RBI tool from its operating mechanism.