Consider the following statements about open market operations:
(A) Outright open market operations are permanent in nature.
(B) The RBI conducts repo and reverse repo operations at various maturities such as overnight, 7-day and 14-day.
(C) When the RBI buys a Government bond in the open market, the total amount of reserves in the economy increases.
(D) When the central bank sells securities in an outright open market operation, it promises to buy them back later.
(E) The purchase and sale of government bonds is entrusted to the Central bank on behalf of the commercial banks.
Which of the statements given above are NOT correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (D) and (E) only
(A) Outright open market operations are permanent in nature. — Correct. There is no promise to reverse the deal.
(B) The RBI conducts repo and reverse repo operations at various maturities such as overnight, 7-day and 14-day. — Correct. These are the maturities at which the RBI runs them.
(C) When the RBI buys a Government bond in the open market, the total amount of reserves in the economy increases. — Correct. The RBI pays by cheque, which adds to reserves.
(D) When the central bank sells securities in an outright open market operation, it promises to buy them back later. — Incorrect. An outright sale is made without any promise to buy back. A sale with a buy-back agreement is a reverse repo.
(E) The purchase and sale of government bonds is entrusted to the Central bank on behalf of the commercial banks. — Incorrect. The central bank does this on behalf of the Government, whose bonds they are.
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. … The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14day, etc.” |