Explain how the Reserve Bank of India can use open market operations to curb rising inflation. Illustrate your answer with a short example involving the sale of government securities worth Rs. 5 lakh to the commercial banks.

Step-by-step solution

1. Open market operations (OMO) involve buying or selling government securities to control the liquidity in the banking system.
2. When the RBI sells securities, banks pay for them from their reserves, thereby reducing the banks’ reserve balances.
3. Reduced reserves limit the amount of money banks can lend; consequently, the money supply contracts.
4. A contraction in money supply tends to lower the inflationary pressure as less money chases the same amount of goods.
5. In the given example, when the RBI sells securities worth Rs. 5 lakh, the banks’ reserve balances fall by Rs. 5 lakh.
6. The reduced reserves shrink the credit that banks can extend, leading to a decrease in the overall money supply and helping to curb inflation.

Concept tested: OMO to control inflation

Published 7 October 2026 · How this solution was prepared and checked