(a)OR(b)

“Open market operations by Reserve Bank of India (RBI) help in regulating money supply in the economy.”

Justify the given statement with valid arguments.

The Reserve Bank of India (RBI) can regulate the money supply in the economy by the sale/ purchase of government securities in the open market.

When RBI sells government securities, the availability of funds with commercial banks reduces, which in turn curtails their lending capacity. Consequently, the money supply in the economy falls.

On the contrary, when RBI buys government securities, the availability of funds with commercial banks rises, which in turn increases their lending capacity. Consequently, the money supply in the economy rises.

The Central Bank acts as a banker to both central as well as state governments. The Central Bank maintains account, accepts receipts and makes payments for the government and carries out exchange, remittance and other banking operations. It advances credit/loan to the government to meet its requirements in case of crisis.

As a financial advisor, the Central Bank advises the government on various financial and economic matters.