In an outright open market operation, the RBI sells government bonds to private individuals and institutions. Which of the following chains of effects is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Reserves in the economy fall → money supply falls, and the fall is of permanent nature
When the RBI sells bonds, buyers pay the RBI, so reserves and money supply fall. In an outright sale the fall is permanent.
Option (1) Reserves in the economy rise → money supply rises — Incorrect. This happens when the RBI buys bonds and pays for them with a cheque.
Option (2) Reserves in the economy remain unchanged → money supply remains unchanged — Incorrect. The money paid for the bonds goes out of the banks to the RBI, so reserves do fall.
Option (3) Reserves in the economy fall → money supply falls till an agreed date, when the RBI buys the bonds back — Incorrect. A sale with an agreed date and price of buying back is a reverse repo. An outright sale has no such agreement.
Option (4) Reserves in the economy fall → money supply falls, and the fall is of permanent nature — Correct. With no promise to buy back, the money stays withdrawn.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply … Another important tool by which the RBI also influences money supply is Open Market Operations. Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque. This cheque increases the total amount of reserves in the economy and thus increases the money supply. Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply. There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature. … Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. …” |