Q.What is meant by Open Market Operations (OMO)? Explain, with an example, how an OMO sale affects the credit-creating capacity of the banking system.

The correct option is (D) Discriminatory Interest Rate, a qualitative credit-control tool.

The RBI's credit-control tools fall into two groups. Quantitative (general) measures — bank rate, repo rate, cash reserve ratio (CRR), statutory liquidity ratio and open-market operations — control the total volume of credit in the economy. Qualitative (selective) measures — such as a discriminatory or differential rate of interest, margin requirements, moral suasion and consumer-credit regulation — control the direction and use of …

Reverse repo rate is the rate at which the RBI borrows from commercial banks (banks deposit surplus funds with the RBI).

The reverse repo rate is a quantitative tool of monetary policy. When commercial banks have surplus cash, they can lend it to the RBI and earn interest at the reverse repo rate. By raising the reverse repo rate, the RBI encourages banks to park more funds with it, reducing the money available for lending and thereby controlling excess liquidity and inflation; lowering it has the opposite effect. It is the opposite of the repo rate, a …