Open market operations refer to the sale and purchase of securities (mainly government securities) in the open market by the central bank.
Open Market Operations refers to the buying and selling of securities, mainly government securities, by the central bank in the open market.
Let us see how it works.
Suppose, the central bank buys the securities. The central bank makes payments by cheques.
The seller of securities deposit these cheques in their respective bank accounts.
Deposits with the commercial bank increase.
This in turn raises the credit creation capacity of these banks.
Borrowings from banks increase leading to an increase in demand for goods and services.
This helps in checking deflationary tendencies.
Now suppose the central bank sells the securities. The buyers make payment by cheques.
Deposits with the commercial banks decrease.
This in turn reduces the credit creation capacity of the commercial banks.
Borrowings from banks decrease leading to a decrease in demand for goods and services.
This helps in checking inflation.