Question

Explain how open market operations can impact business activities. Please support your discussion with the facts and data from Malaysia or India or China.

Answer 1

Open market operations are conducted by the government in order to infuse liquidity into the economy by purchasing government securities at times of a liquidity crunch and high interest rates. In India, the open market operations are conducted aggressively, especially during the second half of the financial year when there is liquidity crunch. This happens because the government expenditure is no longer that high later during the year while the public expenditure increases as the festive season arrives. The RBI intervenes to maintain  the liquidity flow in the economy and keep the interest rates stable to encourage investment. The open market operations have also been criticised on the grounds that they create greater government debt and lead to inflation in the economy.