Question

Explain how open market operations are helpful in controlling credit creation.

Answer 1

Open Market Operations refer to the buying and selling of securities either to the public or to the commercial banks in an open market. Open Market operations refer to the buying and selling of securities in an open market, in order to affect the money supply in the economy. The selling of securities by RBI will wipe out the extra cash balance from the economy, thereby limiting the money supply resulting in controlled credit creation.
To summarise,
Selling of securities in the open market$\Rightarrow$ Extra Cash Balance$\downarrow \Rightarrow$ Money supply $\downarrow$(Controlled Credit Creation)