Identify the correct statements from the following :

(A) When central bank buys securities without any promise to sell them later is called injecting

(B) Open market operations is buying and selling of securities by the commercial bank

(C) Open market operation leads to a change in bank rate

(D) When central bank sells securities without any promise to buy them later is called injecting

(E) RBI influences money supply through open market operations

Choose the correct answer from the options given below :

(A) and (E) only

The correct answer is option (1) : (A) and (E) only

(A) When central bank buys securities without any promise to sell them later is called injecting : This is correct. When the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later

(B) Open market operations is buying and selling of securities by the commercial bank : This is incorrect. Open market operations involve the buying and selling of securities by the central bank, not commercial banks.

(C) Open market operation leads to a change in bank rate : This is incorrect. Open market operations typically influence short-term interest rates, not the bank rate directly.

(D) When central bank sells securities without any promise to buy them later is called injecting. This is incorrect. It is called absorption. When the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later.

(E) RBI influences money supply through open market operations : This statement is correct. The RBI uses open market operations to influence the money supply by adjusting the amount of liquidity in the banking system through buying or selling government securities.

"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.

However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. 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. The rate at which the money is withdrawn in this manner is called the reverse repo rate.