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Jan 09 2013

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Why Central Bank Conducts Open Market Operations

Open market operation is the most powerful instrument for the central bank to conduct open market operation to buy and sell in open debt markets and government securities for its own account. These securities may be treasury securities, treasury bonds, treasury bills and other kinds of debt securities. The central bank prefers to use treasury bills due to its extended market acceptance and liquid features welcoming by the majority of the investors who participate central bank’s open market operations. Treasury bills can be sold in bulk amount without disrupting the prices or the yields of bills. The major participants of such kind of open market operation are mainly commercial banks and also other financial intermediaries who are dealers in government securities.

The unit of the central bank that decides on the general issues of changing the rate of growth in the money supply in the form of open market operation sales or purchase of securities in order to stable money supply in the market. The open market operation is conducted through a committee and they meet as per their scheduled time frame to monitor economic activities and behaviour of economic variables under present market situations. The economic variable may include short term interest rates, the U.S dollar exchange rates with major foreign currencies, commodity prices and foreign currency reserve. After this kind of analysis, this market operation committee sets the direction of monetary policy for the upcoming future keeping stable situation of both money supply and demand in the form of open market operation.

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