Buy and sell Central Bank open market bondsDiscuss the tool in detail?

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Open Market Debt Bonds (Open Market)

Operations: -

The buying and selling of debt securities in the open market is another important tool of the central bank's numerical control system. Trading in the open market began with World War II. This tool has an immediate effect on the purchasing power of the economy. Therefore, this tool is widely used by the central bank. What are debt securities before looking at the way it reacts in the economy? It is worth watching. So the simplest definition of a debt bond is as follows.

Debt bond: -

"Debt bond is a written promise or agreement made by the government to a person or entity for a specific period of time, at a fixed interest rate."

When the government needs money, such loans are issued and it is raised through sales through the central bank. The central bank, in line with its monetary policy objectives, controls the decline by buying and selling such securities to expand and reduce credit.

Now the question arises, why such an individual or an institution?

Buy. Such bond purchases are mainly made for the following three purposes.

1) Cash in cash is:

Cash is the power to convert cash into cash. Bonds or institutions invest their advance money in such bonds as bonds can be sold in the market immediately and converted into money.

2) Income from cash is:

Cash is a means of earning income. Income can be earned by selling cash in the open market. Also, when government bonds are sold, the government sells them at a price lower than the face value of the bond and buys it after a certain period of time by paying a face value. This means that such bonds are the main source of income. So people buy bonds.

3) There is security in investing in cash:

The third purpose of buying bonds is to have more security in such bonds. Because the government is the debtor. For these three reasons, ordinary people or institutions buy such bonds.

The central bank controls the decline of hope through the sale and purchase of debt securities. The buying and selling of these bonds have a double effect on the country's credit formation. Hence this tool is also called the double-edged sword of fall control.

When money in the economy rises for inflation. The momentum has been created. And the bank sells such bonds when the central bank's policy is the credit crunch. Such borrowers are then bought by individuals, merchants, institutions, or commercial banks. Then the money in the economy goes to the central bank. As a result, demand for goods decreases, and prices of goods decrease. It also reduces the number of deposits from commercial banks. As a result, their lending rate automatically decreases and credit formation decreases.

On the other hand, the cash that accrues to the government from the sale of cash. The government uses it for long-term investment. As a result, the country's income increases, the supply of goods increases and as a result, the prices of goods fall and inflation in the economy slows down.

Conversely, when the economy is in recession, commodity prices continue to plummet, and the central bank buys such government bonds. She buys bonds at exorbitant prices. This results in an increase in the amount of money held by the people, the organization, and the bank. It increases the purchasing power of the people and increases the prices of goods. And with the increase in bank deposits, the bank's credit formation increases. This results in a gradual increase in prices. Thus the price increased from the sale of bonds It is limited. Falling prices are offset by the purchase of bonds.

And economic stability is created in the economy.

Limitations

Purchase of open market securities by the central bank to control the fall Sales are limited as follows.

There is no compulsion to buy such government bonds in the open market. Therefore, this tool will not be effective if individuals, institutions, or commercial banks do not purchase such bonds.
The coin market and capital market of the country need to be developed for the success of cash buying and selling. If not here's a new product just for you! It will not have an impact on the economy.
In an economy where the interest rate on deposits is higher than the interest rate on such bonds, this tool will not be effective as people will invest their savings in other deposits without investing in such bonds.
As many bonds are available as required by the Central Bank If not, it will not work.
This tool is more successful in a recession than in a boom. So in times of boom, the effect of this tool is not so much felt.
The success of this tool depends on the speed of money in the country. If the speed of money is high then this instrument fails and the speed of money is stable.
The success of this policy depends on the cooperation of commercial banks.