Question

Explain how open market operations are helpful in controlling credit creation.​

Answer 1

Answer:

Open Market Operations refer to the buying and selling of securities either to the public or to the commercial banks in an open market. ... The selling of securities by RBI will wipe out the extra cash balance from the economy, thereby limiting the money supply resulting in controlled credit creation.

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Answer 2

Answer:

Open market operations refer to the sale and purchase of government securities and bonds by the Central Bank.

While controlling inflation, the Central Bank sells government securities to the public through the banks. This results in the transfer of a part of bank deposits to the Central Bank account and reduces credit creation capacity of commercial banks.

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