Q.Explain how Open Market Operations (OMO) are used by the RBI to expand or contract credit.

Open-market operations change the reserves of commercial banks by moving government securities into or out of their hands in exchange for cash. …

Open Market Operations (OMO) are the buying and selling of government securities by the RBI in the open market, used to change the reserves of the banking system.

To contract credit (fight inflation): the RBI sells government securities. Buyers pay for them with cheques drawn on their bank accounts, so cash flows from the commercial banks to the RBI. Banks' reserves fall, and with a smaller reserve base their capacity to create credit (via the multiplier $1/r$) shrinks. The money supply and aggregate demand fall.

To expand credit (fight recession): the RBI buys government securities. It pays sellers, and the money flows into the commercial banking system as fresh reserves. With larger reserves, banks can create more credit, expanding the money supply and aggregate demand. …

Reversing the direction is the key error: selling securities reduces credit (cash leaves banks), and buying them increases credit …