Open market operations means the sale and purchase of all kinds of bills and securities by the 'central banks in the open market'. In narrow terms, this method, signifies sale and pruchase of government securities by central bank in the open market. In short, according to this method central bank controls the volume of credit by increasing or decreasing the quantity of money in the economy through sale and purchase of securities in the money market. The functioning of this method is like this: When central bank of the country wants to increase the volume of credit, it starts purchasing securities from the market. These securities are generally bougth at a higher price than the market price. As such, banks start selling them, as a result of which their cash reserves increase, i.e., their liquid assets increase. As a result of this, banks now can create more credit. On the contrary, when central bank wants to control the volume of credit, it starts selling securities in the market which are bought by the commercial banks. With the result, their cash reserves are reduced and this adversely affects their power of creating credit. In short, 'for expanding the volume of credit central bank purchases securities and for reducing the volume of credit, it sells securities in the open market. In this way, according to this method, the volume of credit is controlled and regulated by controlling and regulating the cash reserves and credit creating power of commercial banks.
