The RBI makes an outright purchase of government bonds worth Rs 20 crore. The Cash Reserve Ratio is 25 per cent, the people hold no currency and all loans return to banks as deposits. What happens to money supply?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → It rises by Rs 80 crore, permanently
Given:
Outright purchase of bonds by the RBI = Rs 20 crore
CRR = 25 per cent
The RBI pays by cheque, so reserves rise by Rs 20 crore. These reserves support deposits = reserves × money multiplier.
Money multiplier = 1 ÷ CRR = 1 ÷ 0.25 = 4
Rise in money supply = 20 × 4 = Rs 80 crore
An outright purchase has no promise to sell the bonds back, so the rise is permanent. A rise only till the bonds are resold would happen under a repo.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply … 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. …”
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