Q. 134.3( 6 Votes )

Discuss any one o

Answer :

Governments bank: RBI or central bank acts as a banker, agent, and a financial advisor or the government. As a banker to the government it maintains the accounts of the government.

As an agent it buys and sells securities on behalf of the government.

As an advisor to the government, it frames policies to regulate money market.

Open market operations

Open market operations refer to the buying and selling of securities in the open market by the central bank.

• Sale of securities: Central bank soaks the liquidity in the market by selling the securities. It reduces the reserves of the commercial banks and it reduces the credit creation capacity of a bank.

• Purchase of securities: Central bank releases liquidity in the market by buying the securities. It increases the reserves and raises the bank’s ability to give credit.

Thus, inflation is corrected by selling of securities and soaking liquidity, while deflation is corrected by buying the securities and releasing liquidity.

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