Open Market Operations refers to the buying and selling of government securities by the Central Bank from/to the public and commercial banks.
Open Market Operations is one of the quantitative Credit Control Instruments of RBI.
By practicing it, the RBI can control the credit and money supply in the country.
The RBI is authorised to sell or purchase treasury bills and government securities.
When securities are sold to and purchased by the public, ultimately the amounts are withdrawn or deposited in the commercial banks.
The sale of securities by the central bank reduces the reserves of commercial banks. It adversely affects the bank’s ability to create credit and therefore decreases the money supply in the economy.
The purchase of securities by the central bank increases the reserves and raises the bank’s ability to give credit.