Answer: Option D
Answer: (d)
An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market.
India’s Open Market Operation is much influenced by the fact that it is a developing country and that the capital flows are much different than those in the other developed countries. Economists claim that an increase in money supply alone constitutes inflation.
In India, the Reserve Bank of India uses policy rates and reserve ratios such as Cash Reserve Ratio (CRR) in controlling the money supply. Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities.
A higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact.
A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.