Merits and Demerits of Open Market Operations

Merits and Demerits of Open Market Operations

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The bank's reserves, deposits, and credit-granting capacity are impacted by open market operations. A central bank needs it to keep the economy's growth and inflation in check. Open market activities are coordinated by the RBI and commercial banks. In any case, the general population isn't engaged with completing such tasks. Government bonds are typically purchased by large corporations, high-net-worth individuals, commercial banks, and other financial institutions. These organizations have bank accounts, and the money they use to buy bonds is returned to the RBI each time.

The following are the main benefits of open market operations:

1. This device permits the national bank significant adaptability in the timing and extent of financial arrangement exercises.

2. Open market tasks additionally permit the public authority to stay away from the financial impacts and market shortcomings of more straightforward control measures.

3. Inflation can be kept within a certain range by the central bank, which allows for steady growth and prevents an unchecked rise in the price of goods and services.

4. The reserve of a central bank increases when bond buyers deposit their funds there, reducing banks' ability to provide credit.

5. Additionally, it gives the central bank direct control over the economy's money supply. The banking system can be kept sufficiently liquid and excess liquidity prevented through the use of OMO.

6. This tool for monetary policy also makes it easier to compare the value of the domestic currency to that of other currencies.

The following are some of the drawbacks of open market operations:

1. In order for this instrument to function effectively and on a larger scale, it needs a well-developed securities market.

2. Dealings are limited by this tool because most countries' central banks are not well prepared to deal with losses. Because there will be relatively small losses, they deal in short-term securities.

3. There is a significant difference between open market operations and bank rates. As a result, it's possible that the reserves will be replenished sooner than anticipated.

4. When carrying out this task, central banks typically face numerous challenges. Selling government securities is typically much simpler than buying them.

5. Another major drawback of open market operations is that they may have a negative impact on banks' assets if they affect a large number of securities. The government's borrowing program is also disrupted by this.