A) Open market operation
B) Rationing of credit
C) Variable reserve ratio
D) Dear money policy
Correct Answer: A
Solution :
[a] When RBI sells government security in the markets, the banks purchase them. When the banks purchase Government securities, they have a reduced ability to lend to the industrial houses or other commercial sectors. This reduced surplus cash, contracts the rupee liquidity and consequently credit creation / credit supply. When RBI purchases the securities, the commercial banks find with more surplus cash and this would create more credit in the system. Thus, in the case of excess liquidity, RBI resorts to sale of G-secs to suck out rupee from system. Similarly, when there is a liquidity crunch in the economy, RBI buys securities from the market, thereby releasing liquidity. It's worth note here that the market for government securities is not well developed in India but still OMO plays very important role.
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