Question

Read the following statements carefully:
Statement 1: Open Market Operations refers to purchase/sale of Government Securities (G-Sec) by the Central Bank.
Statement 2: To decrease money supply, Central Bank will sell the Government Securities to commercial banks.

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

OMO is a powerful tool used by the Central Bank to control inflation and liquidity. Selling G-Secs reduces money in circulation, while buying G-Secs increases it.

Answer 1

The Correct Option is C

Statement 1: Open Market Operations (OMO) involve the Central Bank (RBI in India) buying and selling government securities (G-Secs) in the open market. This is a key tool for managing the money supply and liquidity. Buying G-Secs injects liquidity; selling them absorbs it. This statement is true. Statement 2: To reduce the money supply (tighten liquidity), the Central Bank sells government securities. Banks purchasing these securities pay the RBI, decreasing their reserves and lending capacity, thereby contracting the overall money supply. This statement is also true. Since both statements are accurate and describe monetary control via OMO, the answer is Option (C).