explain the role of open market operations in reducing of money supply
Answers
What is Open Market Operation?
Open Market Operation comes under the Monatary Policy of RBI. The operation in which RBI sells and buys government securities in open market so as to absorb or exclude liquidity of money supply in the economy is known as Open Market Operation.
Role of Open Market Operation in reducing money supply
RBI apply open market operation in the condition of inflation when market prices goes excessively high and flow of money increases.
By open market operation, RBI sells government securities to the commercial banks. In this manner RBI absorbs the liquidity of commercial banks. After purchasing government securities, commercial banks don't have enough money to provide loans.
When loan providence reduces, the flow of money in the economy decreases. Market prices come down and inflation comes under control.
The economy gets a balance. And this all happened after the open market operation by RBI.