Open market operation policy: When central bank controls credit by buying and selling the bond, debenture, securities etc. in open market is known as open market operation policy. If commercial banks reduce their credit, it reduces the capital in the market. In this circumstances, the central bank buys a bond, debenture, securities etc. from the market and issue cheque against the payment. Those cheques are then deposited into the bank account and banks will get money to increase credit. Again, when there is excessive credit in the market, the central bank sells and issues debenture, securities etc. As a mull central bank collects the money from public and thus reduces the credit giving the power of commercial banks. In this way of buying and selling a share, securities, bond, debenture etc. central bank, keeps balance in demand and supply of money in the market.
The precondition to applying open market pulley:
- The successes of open market policy are dependent on following preconditions-
- Enough bills are needed to be offered in the open market policy.
- If commercial banks have the excess cash reserve, this policy is not applicable.
- A good relationship between the central bank and the commercial bank is needed.
- Favorable investment opportunity must prevail.
- The standard type of money market is needed.
- The practice of maintaining account must prevail among people etc.