Question

Arrange the following statements in the correct chronological order with respect to open market operations:

• [(A)] Payment for bonds increases total reserves in the economy
• [(B)] RBI buys government bonds from the market
• [(C)] RBI sells bonds when there is excess money supply
• [(D)] Higher reserves increase money supply in the economy

• A. (A), (B), (C), (D)
• B. (A), (C), (B), (D)
• C. (B), (A), (D), (C)
• D. (D), (A), (C), (B)

Hint:

Remember:

• RBI buys bonds $\rightarrow$ Money supply increases
• RBI sells bonds $\rightarrow$ Money supply decreases
• Open Market Operations regulate liquidity in the economy

Answer 1

The Correct Option is C

Concept: Open Market Operations (OMO) are monetary policy tools used by the Reserve Bank of India (RBI) to regulate money supply through buying and selling government securities.

Step 1: Identify the first action by RBI. The process begins when: \[ \text{RBI buys government bonds from the market} \] Thus: \[ (B) \text{ comes first} \]

Step 2: Understand the effect of bond purchase. When RBI purchases bonds: \[ \text{Payment is made to sellers} \] This increases: \[ \text{Total reserves in the banking system} \] Thus: \[ (A) \text{ comes next} \]

Step 3: Effect of higher reserves. Higher reserves enable banks to:

• Give more loans
• Create more credit

Hence: \[ \text{Money supply increases} \] Thus: \[ (D) \text{ follows} \]

Step 4: Control excess money supply. If money supply becomes excessive: \[ \text{RBI sells government bonds} \] This absorbs liquidity from the economy. Thus: \[ (C) \text{ comes last} \] Therefore, the correct chronological order is: \[ (B) \rightarrow (A) \rightarrow (D) \rightarrow (C) \] Hence, \[ \boxed{(B),\ (A),\ (D),\ (C)} \]