Question

Open market operations, one of the measures taken by RBI in order to control credit expansion in the economy, results in a _________.

• A. sale or purchase of government securities
• B. issuance of different types of bonds
• C. auction of gold
• D. to make available direct finance to borrowers

Answer 1

The correct option is A sale or purchase of government securities

RBI's open market operation transactions are carried out with a view to regulate liquidity in the economy, prices of essential commodities and inflation. Open market operations refer to sale and purchase of securities in the open market. During inflation, securities are sold to reduce the liquidity of cash from the economy. As a result, the money supply gets reduced and the inflation also gets checked. Since, the infllation is corrected, prices of essential commodities also starts to fall. Whereas, during deflation, securities are purchased from the market.