+1 862 207 3288 Open Market Operations
It refers to sale and purchase of government securities like treasury bills, bonds, etc in open market. They are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. Purchase of securities injects money supply in the economy as it transfers money from the hands of the government to people in the economy whereas sale of securities acts a leakage and contracts money supply in the economy. Through open market operations, federal bank alters monetary base of the economy.
Lending Rates
Reserve bank provides a discount window facility to the commercial banks and other financial institutions to meet provisional shortage of funds that occurs due to internal or external disruption. The rate at which federal bank lends to the commercial banks is called Discount Rate. Through discount windows commercial banks adjust money supply in the economy. This also modifies economic scenario of the nation.
Interest Rates
Federal bank can vary money supply indirectly by affecting nominal interest rate. Higher nominal interest rate on loans, savings and other financial assets shrink money supply as they discourage borrowings and encourages savings.
Reserve Requirements
Commercial banks are required to maintain some amount of their deposits as their personal reserves and reserves with Federal Bank. It is regulated by central authorities through Cash Reserve Ratio (CRR) and Statutory Reserve Ratio (SLR).
(i) Cash Reserve Ratio (CRR) is the minimum fraction of total deposits that commercial banks have to maintain as reserves with the Federal Bank.
(ii) Statutory Reserve Ratio (SLR) is the proportion of total deposits that commercial banks have to maintain as reserves with themselves.
An increase in such reserve requirements reduces the cash available with the commercial banks and shrinks the lending capacity of these financial institutions. On the other hand any reduction in these reserve requirements boosts their lending ability and adds to economic growth.
