Professional Documents
Culture Documents
Generation of Employment
External Stability
IMPLICATIONS
DECISIONS
TOOLS OF MONETARY POLICY
Open Market Operations or OMO refers to the purchase and/or sale of short term and long term securities by
the RBI in the open market.
OPEN MARKET
OPERATIONS
OPEN MARKET OPERATIONS
When RBI sells securities in open market,
commercial banks and public buy it. This
reduces the existing money supply as
money gets transferred from the
Commercial Banks to RBI.
Individuals
RBI
Thus EXCESS
MONEY SUPPLY
Sells reduces
Securities
Controls Inflation
OPEN MARKET OPERATIONS
When RBI buys securities from
commercial banks in open market,
commercial banks sell it and get back
the money they had invested in them,
thereby increasing the existing money
supply.
Individuals
RBI
Buys
Securities
Thus SHORTAGE of
MONEY SUPPLY is
eased
Controls Recession
BANK RATE
Bank Rate or Discount Funds are provided either through
Rate is the MINIMUM lending directly or discounting or
rate at which RBI buying money market instruments
provides loans to the like commercial bills and treasury
Commercial Banks bills.
Gives Loan
BANK RATE
Bank Rate Increases
= Cost of Borrowing of Commercial Current Bank
Banks Rises Rate of RBI is
= Fall in Credit Volume to Banks 6.75%
= Reduction in Money Supply
Takes Loan
TEST YOUR KNOWLEDGE!!