Steps in Open Market Operations

Steps in Open Market Operations

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OMOs or, the Open Market Operations are used by the RBI in India to achieve monetary policy goals like price stability, economic growth, and financial stability. Open market operations are carried out as follows:

I - Setting up of the Target Rates of Interest - The national bank settles on an objective financing cost that it needs to accomplish in the economy. For instance, the target federal funds rate is set by the US Federal Reserve.

II - Evaluation of the Money Supply - The central bank then evaluates the economy's money supply to determine whether it must increase or decrease it in order to achieve its target interest rate.

III - Buying or Selling Securities - The central bank purchases securities from banks and other financial institutions, such as government bonds, to boost the economy's money supply. The central bank sells securities back to banks and other financial institutions to reduce the amount of money in circulation.

IIV. Paying or, Receiving for Securities - When the central bank purchases securities from banks, it credits the bank's reserve account to cover the purchase price. The securities it sells to banks are paid for by the banks by debiting their reserve account.

V: Changes in the Money Supply - The economy's money supply is affected by changes in the reserves of banks caused by the central bank buying or selling securities. Banks have more reserves to lend out when the central bank buys securities, which raises the money supply. Banks have fewer reserves to lend out when they sell securities, which reduces the money supply.

VI: Changes in Interest Rates - The economy's interest rates change in tandem with changes in the money supply. Interest rates typically rise when the central bank reduces the money supply, while rates typically rise when the money supply is increased.