Class Test - Data Interpretation, Puzzles 

Open Market Operations - 15 Mints Seminar Notes

Introduction

• Open market operations (OMO) are actions a central bank takes to control the money supply, such as open market purchases and sales of short-term Treasury securities and other securities. 
• The Federal Reserve (Fed) uses open market operations to influence interest rates in the United States, specifically the federal funds rate used for interbank lending. 
• Buying securities puts money into the economy, which lowers interest rates and makes loans more available.
  

Open Market Operations

What are Open Market Operations?

The selling and buying of Treasury Bills and other Government Securities by a country's Central Bank in order to control the amount of money in the economy are known as open market operations.

Open market operations are a part of central banks' most important monetary control methods. When the central bank wants to reduce the market's money supply, it sells securities on the open market. The intention is to raise interest rates. This approach is also known as contractionary monetary policy.

Similarly, when the central bank wants to increase the amount of money on the market, it will buy securities. This action is being taken to lower interest rates and promote the nation's economic growth. This strategy is known as expansionary monetary policy.

Temporary Open Market

Operations (TOMOs)Repurchase Agreements, Reverse Repurchase Agreements

Types of Open Market Operations

The two types of open market activities are permanent open market operations and transient open market operations.

1. Permanent Open Market Operations (POMO): These involve the central bank of any country selling and buying securities or treasuries on the open market in order to change the money supply. It is a means of influencing the economy.

2. Temporary Open Market Operations: These are used to add or subtract reserves from or into the banking system on a short-term basis. Repurchase agreements, also known as Repos or reverse repurchase agreements, or RRPs, are used for short-term open market transactions.

Example: RBI's Role in Open Market Operation

The Reserve Bank of India conducted open market operations for the first time in 2019. In India, the RBI regulates OMOs by buying and selling G-Secs, government securities, in and out of the market. The main goal is to change the rupee's market liquidity conditions in the long term. When the RBI determines that there is more than adequate liquidity in the market, it sells securities and reduces rupee liquidity. On the other hand, the Reserve Bank of India purchases from the open market when it perceives a liquidity constraint.

Case Study

• Explain with an example of a federal bank engaging in outright open market operations. Understanding how the Federal Reserve of the United States sets monetary policy is critical to comprehending open market operations in India. The United States is the best open market operations example for us to understand the many nuances of free market activities. 
• In order to preserve the stability of the US economy and avoid the negative effects of inflation or deflation, the Federal Reserve Board establishes a goal known as the federal funds rate. Federal funds rates are the interest rates that banks charge one another for overnight loans. Due to this consistent flow of enormous sums of money, banks can ensure that their cash reserves are sufficient to meet client demands.
  
• In addition to serving as a benchmark for other interest rates, the federal funds rate determines the direction of a variety of interest rates, including those on credit cards, mortgages, and savings accounts.
  

Conclusion

• We could conclude that open market processes are critical components of an economy. They are required to maintain a consistent and controlled flow of funds into the market. 
• The Federal Reserve uses open market operations to raise or lower interest rates by buying and selling securities in the open market. They are one of the tools available of the Federal Reserve for accelerating or decelerating the nation's economic activity. Through open market operations, the Federal Reserve injects or removes money into the country's money supply.
  

Presented by

Arvind

CAT Student

MAGME MEDAL, HOSUR

NEFT, RTGS, ECS CREDIT, ECS DEBIT - 15 Mints Seminar Notes

National Electronic Funds Transfer (NEFT)

• National Electronic Funds Transfer (NEFT) is a mode of online funds transfer that is introduced by the Reserve Bank of India (RBI). 
• It quickly transfers money between banks throughout India. A bank branch must be NEFT-enabled for a customer to be able to transfer the funds to another party.
  
• In December 2019, the Reserve Bank of India (RBI) has introduced the all-new NEFT payment system that is active and up 24×7 and 365 days a year. 
• The objective behind this new clearance system is to promote digital transactions and the global integration of Indian financial markets.
  
• You can place an NEFT request at any point in time. 
• The NEFT request will be sent to a queue. All the NEFT requests in the queue will be cleared once every hour.
• Real-time gross settlements are a process that is used for high-value inter-bank transactions. These transactions typically need instant and full clearing and are generally done by the central bank of the country.

RTGS

• RTGS reduces the overall risk as these settlements are made almost instantly throughout the day. 
• It is not like National Electronic Funds Transfer (NEFT) in which settlements are made in batches. Hence, the charges involved in the real-time gross transfer of funds may incur higher costs to customers.
  
• All that a customer needs to furnish to transfer funds through real-time gross settlement is the duly filled form which contains the information of the account from which the funds have to be debited from, the account to which the funds have to be credited, and message (if any).

ECS credit

• ECS credit is used for allowing credit to a large number of beneficiaries by raising a single debit to the customer’s account, such as dividend, interest or salary payment.
• The end beneficiary need not make frequent visit to his bank for depositing the physical paper instruments.
• Delay in the realisation of proceeds, which used to happen in the receipt of the paper instrument, is eliminated.
• The ECS user helps to save on administrative machinery for printing, dispatch and reconciliation.

ECS debit

• ECS debit is used for raising debits to a number of accounts of consumers or account holders for affording a single credit to a particular institution, in cases such as utility payments like electricity bills and telephone bills.

Trouble-free: 

• Eliminates the need to go to the collection centres or banks and the need to stand in long queues for payment.
  

Easy to track: 

• Customers are not required to track down payments by last dates. The ECS users would monitor the debts. 
• The ECS user saves on administrative machinery for collecting the cheques by monitoring their realisation and reconciliation.
  

Presented by

Arvind R

CAT Student

MAGME MEDAL, Hosur

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