Discussion
The RBI sells government securities to control the _______:
Answer: B
Correct answer: Flow of Credit
Selling government securities takes cash out of the banking system: buyers pay the RBI and receive paper in exchange, so the banks' reserves fall. With smaller reserves they can support less lending, and the flow of credit contracts.
This is the contractionary use of open market operations, applied when inflation or excess liquidity needs restraining. It works quickly and can be finely graduated, unlike a change in the cash reserve ratio, which is blunt and applies to every bank at once.
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