In 2013, UPSC walla asked a very chillar question from this topic.

In context of Indian Economy, Open Market Operation refers to

1.
2.
3.
4.

Borrowing by scheduled banks from RBI

Lending by commercial banks to industries and trade
Purchase and sale of government securities by the RBI
None of Above

Whenever you face a GS/GK type MCQ, Youve three choices

Skip

If you dont know the answer, Just leave it

instead of risking negative mark.
Attempt
Correct answer is Opt C.
Mark n Review.
It means youve unsure of the answer. 50:50. So
you mark the question number (say 45), at the
back of your question paper. At the end of exam,
if youre left with 10-15 free minutes. You look at
the question again, and try to solve it.
So, should you put above question in mark n review?

No.
Because its a definition based question. If you dont know the definition of OMO you might
tick a wrong answer and fail. Most of the sincere players fail in prelims because of this reason.
They push their luck in negative marking to overcome an imaginary cutoff and thus dig up their
own grave. (especially during last 10-15 minutes of the exam.)
Moral of the story: never put fact/definition type MCQs in Mark-n-Review.

Lets solve a bit more complicated MCQ from 2012s CSAT paper.
Q.Which of the following measures would result in an increase in the money supply in economy?
5.
6.
7.
8.

Purchase of government securities from public by central bank

Deposit of currency in commercial banks by the public
Borrowing by government from the central bank.
Sale of government securities to the public by central bank.

Answer choice
9.
10.
11.
12.

Only 1
2 and 4
1 and 3
2, 3 and 4

Whenever you face such multiple statement type MCQs, always use elimination method. First find a
statement that is definitely right or definitely wrong and eliminate choices accordingly.

13.
14.
15.
16.

Focus on first statement Purchase of government securities from public by central bank: will it
increase money supply in the system?
Imagine Rajan puts an ad in newspaper: bring your Sabzi (vegetables), Ill buy it. Junta gives him
their own veggies, Rajan gives them money. (a classic buy and sell).
Ultimate result: money supply increased in the system- because junta got the money. Meaning
#1 definitely correct.
If you think it on technical terms. Central bank purchases government securities=OMO (Open
market operation), where money shifts hands from RBI to people.
Hence money supply increased. (In reality, money doesnt go to aam admi directly, but those
bankers and non-banking institutions who participate in OMO). Anyways, #1 is right, Eliminate
choices that do not have #1
Only 1
2 and 4
1 and 3
2, 3 and 4

Now the final answer depends on whether statement #3 is right or wrong?

Statement #3 says Borrowing by government from the central bank. (So, will it increase
money supply?)
How does Government borrow from Central bank? Does Mohan just callup Rajan and demand 1
lakh crores? No. Mohan will have to give Rajan that much government securities (vegetables)
and Rajan will give him cash.
Is money supply increased? Yes Mohan sold veggies to Rajan and got Money. Whenever Rajan
buys veggies and pays the money supply is increased. (this is similar to Open Market operation)

Besides, Mohan can then use money to pay salaries of government staff, pay for rail-roadbridges and other infrastructure projects, pay for MNREGA and so on. Therefore Answer C: 1
and 3 correct.

Counter- argument?

What if Rajan subsequently sells those (Mohans) securities to bankers. Then bankers money
reduced. Hence #3 is wrong. Therefore final answer A only 1.

So, whats the final answer: is it A or is it C?

Ultimate judge= UPSCs official answer key uploaded on their site.
In 2012s Question paper Test series A, this is Q77: and its official answer is C. Therefore, both 1 and
3 are correct.
Anyways, what to do in the exam?
Skip
Attempt

If you dont know the concept better skip.

This question is attemptable if you dont drag the
logic too much in statement #3.
Mark n Review.
Yes, it can be put under mark and review
because this is not an absolute fact/ absolute
definition type MCQ. If you apply some concepts,
you can eliminate wrong choices. But still if doubt
persists in the mind (e.g whether Statement 3 is
right or not) then its always safe to skip and
avoid negative marking.
By the way, What about Statement #2: Deposit of currency in commercial banks by the public. (Will it
increase money supply or not?)

Viewpoint 1: yes. Because bank can used it to expand loanable credit. (as explained in Money
creation topic in Class 12 NCERT Macroeconomics page 39 onwards).
Viewpoint 2: no. (Because Bank will have to put some money aside as CRR- so that much money
is less in the system.)

Either way it doesnt change the answer. Because We know that statement 1 is definitely correct. And
there is no option where (1,2) are given simultaneously.

Q. RBI Acts as bankers bank. This would imply which of the following?
1. Other banks retain their deposits with RBI
2. RBI lends funds to commercial banks in the times of need.
3. RBI advises commercial banks on monetary matters.
Correct Statement
4.
5.
6.
7.

Only 2 and 3
Only 1 and 2
Only 1 and 3
1, 2 and 3

Approach:
Whenever you face such 3 statement MCQ or 4 statement MCQ, Always use elimination method. First
you find out a statement that is definitely right or definitely wrong. In above case, we can see #2 is
definitely right. RBI lends funds to banks in the times of need (Repo, MSF)
So lets eliminate choices that dont involve statement #2
8.
9.
10.
11.

Only 2 and 3
Only 1 and 2
Only 1 and 3
1, 2 and 3
This did not help much. We still have three choices left. Observe statement #1: Other banks
retain their deposits with RBI. That is correct with respect to cash reserve ratio. CRR is one type
of deposit that banks make to RBI. (RBI doesnt pay interest on it- thats a different story).
Meaning #1 is also correct eliminate choices that donot have #1
a. Only 2 and 3
b. Only 1 and 2
c. Only 1 and 3
d. 1, 2 and 3

Only two choices left and the ultimate solution = is statement #3 is correct or not?
Viewpoint #1
The statement says RBI advises commercial
banks on monetary matters.The word
advises makes this statement incorrect.
Because RBI doesnt Advice they just order the
banks- be it SLR, CRR, PSL. RBI doesnt advice,
RBI gives orders and direction. Therefore
statement #3 is wrong.
Even if we accept that RBI advices, still the
questions asks what is implied by RBI as

Viewpoint #2
RBI does advice those banks. We saw it under
Moral Suasion. Therefore, Statement #3 is
right.

Money Banking and finance, E Narayan Nadar

(PHI publication). He has specifically listed this

Bankers bank. So, RBI advices moral suasion Advice function under Bankers bank topic.
that is a monetary policy tool. RBIs not doing it
as a Banker to those banks. Therefore,
Statement #3 is definitely wrong.
Answer (B)
Answer (D)
So, is it B or is it D? Final judge is UPSC.
They had uploaded CSAt-2012 official answer key on their site.
This question is Test Series A, Question #75 and its official answer is D = meaning all three
statements are correct.
If you face such MCQ in exam, what should be your approach?
Skip

Attempt
Mark n Review

Upto you. But if you start skipping all such

question (OMO, Money supply, Bankers bank),
because youre completely unaware of those
topics=that is not pardonable.it shows youre
underprepared for this exam. You should either
change your study method or change the gametry for some easier exam.
This question is attemptable, if you dont nitpick
over the word advises in third statement.
If youve thoroughly prepared the RBIs monetary
tools (both qualitative and quantitative), you can
solve it by applying concepts/principlesparticularly the moral suasion thing. But if youre
still doubtful over whether #3 is right or wrong,
then better skip. If you skip because youre
doubtful = that is pardonable. But if you skip
because youre completely unaware of this topic=
non-bailable offense.