What is open market operation ? Purposes of Open Market Operations

What is open market operation ? Give the objectives of open market operations.

Contents

Open Market Operation

It indicates the deliberate and direct buying and selling of securities and bills in the money market by the central bank. In other words, when the central bank sells or purchases only the government securities then it is called as the open market operation.

In broader sense, a central bank may purchase or sell any kind of securities and paper with which it deals. The securities or bills may be government securities or other public securities or bankers acceptance or trade bills. But in narrower sense, the central bank purchases or sells only the government securities (long-term and mid-term) and that is called as the open market operation.

When bank creates credit at a large scale, then central bank starts selling its securities. When the credit creation is lowered, the central bank starts purchasing the securities. So the policy of purchasing the securities is referred with the credit expansion.

Purposes of Open Market Operations

Open market operation has the following objectives:

1. To offset the inflow or outflow of gold these operations are used when gold is imported and money and credit gets expanded and price level is increased, then central bank sells its securities and reduces the supply of money and credit.

2. When capital of any country is being exported in huge quantity, then the central bank sells securities to earn extra money.

3. When the people loses their trust on banks and starts with drawing their deposit, then central bank starts purchasing the securities to earn the faith of the people.

4. When money is reduced in the money market, then it starts purchasing the securities with which the quantity of money is increased. When the central bank fails to control the credit, then he uses these open market operations to settle down the matters.