NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
A central bank wants to reduce excess liquidity in the banking system through an open market operation. Which action would achieve this?
Selling government securities to banks reduces excess liquidity, because banks pay cash to the central bank and their reserves fall. Buying securities, lowering the cash reserve ratio or cutting the repo rate would all add liquidity or make credit cheaper, so they do the opposite.
- ASelling government securities to banksCorrect
- BBuying government securities from banks
- CLowering the cash reserve ratio
- DLowering the repo rate
Explanation
Selling government securities absorbs cash from banks, reducing liquidity. Buying securities, lowering CRR and cutting the repo rate all increase liquidity or ease credit.
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