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    Question

    In conducting Open Market Operations (OMO), RBI targets to regulated-   

    A Liquidity in the market Correct Answer Incorrect Answer
    B Interest rates Correct Answer Incorrect Answer
    C Flow of foreign currency Correct Answer Incorrect Answer
    D Lending capabilities of the bank Correct Answer Incorrect Answer
    E Inflation Correct Answer Incorrect Answer

    Solution

    RBI’s mandate is to manage inflation in the economy. OMO refers to the purchase and sale of the Government securities (G-Secs) by RBI from / to market. OMOs are conducted to adjust the rupee liquidity in the economy to ultimately manage inflation. When RBI sells government security in the markets, the banks purchase them, which reduce money with banks and their ability to lend therefore reducing the money supply in market. The reduced money supply will reduce the purchasing power and reduce inflation.  When RBI purchases the securities, the market will have more money supply and it will increase the inflation.

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