Question

In the context of Indian economy, 'Open Market Operations' refers to
1. borrowing by scheduled banks from the RBI
2. lending by commercial banks to industry and trade
3. purchase and sale of government securities by the RBI
4. None of the above

Answer 1

Correct Answer - Option 3 : purchase and sale of government securities by the RBI

The correct answer is the purchase and sale of government securities by the RBI.

• 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 the sale of securities and sucks out the rupee liquidity.
  • It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools that are employed by the central bank of a country to control the money supply in the economy.
• Hence the correct option is 3.

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• Long-term Repo Operations (LTRO)
  • Under LTRO, RBI will conduct a term repo of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1 lakh crore at the prevailing repo rate.
  • As banks get long-term funds at lower rates, their cost of funds falls. In turn, they reduce interest rates for borrowers.
  • LTRO helps RBI to ensure that banks reduce their marginal cost of funds-based lending rates, without reducing policy rates.
• ‘Operation Twist'
  • ‘Operation Twist is when the central bank uses the proceeds from the sale of short-term securities to buy long-term government debt papers, leading to the easing of interest rates on the long-term papers.
  • Operation Twist first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
  • In June 2012, Operation Twist was so effective that the yield on the 10-year U.S. Treasury dropped to a 200-year low.