OMO → G-SAP : 🤩🤩Benefit? Flashcards
What is the primary benefit of the RBI using G-SAP?
The primary benefit of G-SAP is that it increases the money supply in the economy. The RBI purchases existing government securities from investors, injecting new money into the system. This increased money supply supports greater spending, investment, and economic growth.
Describe two ways investors might use funds received from G-SAP transactions.
- Increased Consumption: Investors can use those funds to make purchases, stimulating demand for goods and services within the economy. 2. Investment in Companies: Investors might re-invest that money into shares or bonds of other companies, boosting business activity, job creation, and further economic growth.
Why might the RBI choose G-SAP over simply reducing the repo rate to increase the money supply?
- Targeted Support: G-SAP allows the RBI to target investors who hold existing government securities and want to unlock the funds, but aren’t necessarily interested in taking out new loans. * Inflation and Depositor Concerns: Excessively lowering the repo rate can lead to inflation and reductions in deposit interest rates, negatively affecting some parts of the population. G-SAP is a more controlled method.
List two potential negative consequences of the RBI reducing the repo rate too much.
- Inflation: An overly rapid expansion of the money supply can cause prices of goods and services to rise faster than economic growth, leading to inflation. 2. Reduced Deposit Interest Rates: Banks may lower the interest they offer on savings accounts if the repo rate is too low, negatively impacting middle-class savers and those who rely on interest income, such as pensioners.
What is the RBI’s primary tool for increasing the money supply in the economy, and how does it work?
The RBI’s primary tool for increasing the money supply is G-SAP (Government Securities Acquisition Programme). It works by the RBI purchasing government securities (G-Secs) from the open market, injecting money into the banking system.
Describe the key differences between G-SAP and OMO in terms of their purpose and transparency.
Purpose:
G-SAP is primarily used to increase the money supply and support economic growth.
OMO can be used to control inflation (by selling G-Secs) or fight deflation (by buying G-Secs).
Transparency:
G-SAP is announced in advance with detailed information about the amount of money, date, and time.
OMO operations are generally not announced with such detail in advance.
What is Operation Twist, and what is its intended effect on the economy?
Operation Twist involves the RBI simultaneously buying long-term government securities and selling short-term government securities. The intended effect is to reduce the yields on longer-maturity bonds, making it cheaper for governments and businesses to borrow for longer periods.
