DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name Staff Member : P. BADARINARAYANA
Designation : Sr. Lecturer
Branch : DCCP
Institute : Govt. Polytechnic, NELLORE
Year/Semester : VI Semester
Subject : BANKING- II
Sub. Code : CCP-604(B)
Topic : Functions of Reserve Bank of India
Duration : 50 Mts.
Sub Topic : Open Market Operations
Teaching Aids : Animations
CCP604(B)43 1
Objective

On completion of this period, you would be

able to
 Comprehend the Open Market Operations function
of RBI.

CCP604(B)43 2
Recap

In the last lesson, we have learnt about

 The bank rate policy of RBI as a measure of credit

control in the market

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Open Market Operations
 This is a method of quantitative credit control
used by RBI to control the credit
 Open market operations means the buying
and selling of eligible securities by the RBI in
the money and capital markets.

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Open Market Operations

 The open market operations are

resorted to by the RBI in order to
maintain security prices and to
stabilize the financial structure of the
country so as to correct inflationary
and deflationary tendencies.

CCP604(B)43 5
Open Market Operations

 In periods of boom, which leads to economic

instability, the RBI sells in the market first class
securities in its possession to reduce the supply
of money.
 The buyers of these securities, whether they are
commercial banks or others, make payment to
RBI by drawing upon their cash deposits in
banks.

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Open Market Operations
 Since commercial banks hold certain reserves or
deposits with the RBI, payment by the banks to RBI
results in reduction of their cash reserves with the
RBI.
 Reduction in their cash reserves, forces commercial
banks to reduce their loans and advances and at
the same time to refuse further loans.
 This brings down the level of investment in the
country.

CCP604(B)43 7
Open Market Operations

 In the times of depression, the RBI buys

the approved securities in the market
for which it pays by issuing cheques
drawn upon itself to the
individuals/institutional sellers of
securities.
 The individuals/institutions deposit
these cheques in the accounts with
banks.
CCP604(B)43 8
Open Market Operations…

 When the commercial banks find their

cash reserves increased, they expand
their loans and thus help in expansion
of investment, employment, production
and prices.

CCP604(B)43 9
Summary

In this lesson we have seen the open

market operations of RBI.

 The RBI sells the securities in the open
market in times of inflation
 If purchases the securities from open
market when there is money stringency in
the money market

CCP604(B)43 10
Quiz

1. Open Market Operations are for

a) Stabilize financial structure.

b) Increase prices.
c) Decrease prices.
d) Destabilize the industry.

CCP604(B)43 11
Frequently asked questions
1. What is meant by Open Market
Operations function of RBI.
2. What is the purpose of selling securities
by RBI in the open market?

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