Consider the following statements regarding Open Market Operations (OMOs) conducted by the Reserve Bank of India:
1. Outright purchase of government securities injects durable liquidity into the banking system.
2. Outright sale of government securities absorbs liquidity from the market.
Which of the statements given above is/are correct?
Answer and explanation
Correct answer: A. Both 1 and 2
- Step 1: When RBI purchases government bonds in open market operations, it credits bank reserves, expanding money supply and liquidity. Statement 1 is correct.
- Step 2: When RBI sells bonds, commercial banks pay with liquidity, absorbing surplus cash from the financial system. Statement 2 is correct.
Answer
Both 1 and 2 are correct.
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