UPSC Prelims 2013 · Question 25 of 99
UPSC Prelims 2013 question on Open Market Operations
- ExamUPSC CSE
- Year2013
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyEasy
- TypeDirect
In the context of Indian economy, ‘Open Market Operations’ refers to:
Show answer
Answer: C. Purchase and sale of government securities by the RBI
Verdict
Correct Answer: Purchase and sale of government securities by the RBI
Analysis
According to the official UPSC Answer Key for Prelims 2013, the correct option is purchase and sale of government securities by the RBI.
Open Market Operations are a monetary policy tool used by the RBI to regulate liquidity and money supply in the economy.
1. Borrowing by scheduled banks from the RBI — Incorrect
This refers to borrowing through instruments like repo rate, bank rate or other liquidity facilities.
It is not called Open Market Operations.
Do not confuse OMO with bank borrowing from the RBI.
2. Lending by commercial banks to industry and trade — Incorrect
This is a normal commercial banking function.
It increases credit in the economy but is not an RBI open market operation.
This is a banking activity, not a direct monetary policy operation by the RBI.
3. Purchase and sale of government securities by the RBI — Correct
Open Market Operations mean buying and selling of government securities by the RBI.
When the RBI buys securities, it injects liquidity into the banking system.
When the RBI sells securities, it absorbs liquidity from the banking system.
Extra UPSC info
* OMO is a quantitative monetary policy tool.
* Government securities are debt instruments issued by the Central or State Governments.
* RBI buying G-Secs increases liquidity and can support credit expansion.
* RBI selling G-Secs reduces liquidity and can help control inflation.
* Standard OMO causes a durable change in liquidity, unlike repo and reverse repo which are usually temporary.
* Operation Twist is a special OMO where RBI buys long-term securities and sells short-term securities simultaneously.
How to crack it
Open Market Operations refer to the RBI’s purchase and sale of government securities to regulate liquidity in the economy.