Description
It is a market operation pertaining to the sale and purchase of government securities and treasury bills. THis document tells about demand for credit, limited effectiveness etc.
Open Market OperationsIt is a market operation pertaining to the sale and purchase of government securities and treasury bills by the central bank of the country. When the Central Bank decided to pump money into circulation, it buys back the government securities, bonds, foreign currency , gold and bills and when it decides to reduce the money in circulation, it sells the government bonds and securities. The Central bank carries out its open market operations through its commercial banks. It does not deal directly with the public. The buyers of the operation are commercial banks, financial corporations, big businesses, individuals with high savings. The open market operations affect the bank deposits, reserves and thereby their capacity to create credit. For example- Central bank decides to reduce the money supply with the public and the availability of credit with the objective of preventing inflation. Central bank will offer the government bonds, bills, foreign currency and gold for sale through commercial banks. The sale of government bonds, securities, gold and foreign currency affects both the demand and supply of credit. 1) When the commercial banks possess excess liquidity, the open market does not work effectively, especially when central bank wants to buy back the bonds etc. 2) In a very buoyant market condition/situation, the effective control of demand for credit through the open market operation is doubtful and during the period of depression, open market operations are not effective for lack of demand for credit. 3) In India, where the banking system is not well developed and security capital markets are not independent, open market operations have limited effectiveness. 4) The popularity of government bonds, securities, foreign currency and gold in the public also matter a great deal. The government bonds etc are generally not popular because of its low rate of return. In recent years, however, the popularity of government bonds has increased due to increasing size factor in stock markets.
doc_144884190.docx
It is a market operation pertaining to the sale and purchase of government securities and treasury bills. THis document tells about demand for credit, limited effectiveness etc.
Open Market OperationsIt is a market operation pertaining to the sale and purchase of government securities and treasury bills by the central bank of the country. When the Central Bank decided to pump money into circulation, it buys back the government securities, bonds, foreign currency , gold and bills and when it decides to reduce the money in circulation, it sells the government bonds and securities. The Central bank carries out its open market operations through its commercial banks. It does not deal directly with the public. The buyers of the operation are commercial banks, financial corporations, big businesses, individuals with high savings. The open market operations affect the bank deposits, reserves and thereby their capacity to create credit. For example- Central bank decides to reduce the money supply with the public and the availability of credit with the objective of preventing inflation. Central bank will offer the government bonds, bills, foreign currency and gold for sale through commercial banks. The sale of government bonds, securities, gold and foreign currency affects both the demand and supply of credit. 1) When the commercial banks possess excess liquidity, the open market does not work effectively, especially when central bank wants to buy back the bonds etc. 2) In a very buoyant market condition/situation, the effective control of demand for credit through the open market operation is doubtful and during the period of depression, open market operations are not effective for lack of demand for credit. 3) In India, where the banking system is not well developed and security capital markets are not independent, open market operations have limited effectiveness. 4) The popularity of government bonds, securities, foreign currency and gold in the public also matter a great deal. The government bonds etc are generally not popular because of its low rate of return. In recent years, however, the popularity of government bonds has increased due to increasing size factor in stock markets.
doc_144884190.docx