What are open market operations of a Central Bank?

Open Market Operations mean the sale and purchase of government securities by the central bank in the open market. It is one of the quantitative methods of credit control.

1. To reduce credit — When the central bank wants to reduce the volume of credit, it sells securities in the open market. Sale of securities props up cash reserves of commercial banks towards the central bank, reducing their capacity to lend.

2. To expand credit — When the central bank wants to expand credit, it buys securities in the open market. This increases the money supply in the banking system, enabling banks to lend more.

In comparison with bank rate policy, open market operations are a more direct and effective method of credit control.