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Open market operations
Open market operations is another traditional weapon in the armoury of the central bank to control the volume of credit in the economy. In a broad sense, open market operations imply the purchase and sale of securities by the central bank on its own initiative in the money and capital markets. Thus, for example, sale of securities in the open market leads to contraction of credit while purchase of securities leads to expansion of credit.
In short, open market-selling of securities leads to credit contraction and open market purchase of securities leads to credit expansion.

Conditions for the Success of Open Market Operations Policy:
There must be a broad and well-organised money market in the country
Commercial banks must maintain a fixed and rigid cash reserve ratio with the central bank.
The demand for credit should change with the rate of interest and the credit-base.
There should not be a large volume of already existing public debt.
There should not be large fluctuations in the prices of government securities.
According to Aschheim, the discount rate should be penal (above the market rate) and not concessional (below the market rate).

Limitations of Open Market Operations :
The sale of securities by the central bank may not reduce the money supply and lead to credit contraction so long as it is possible for the banks to replenish their reserves from the central bank through rediscounting policy or if the hoarded money comes into circulation or if there is a surplus in the balance of payments or if there is an inflow of foreign capital.
Likewise, purchase of securities may not lead to credit expansion if the commercial banks increase their indebtedness.
It has also been said that - purchase of securities by the central bank is not as difficult as selling of securities. Similarly for the commercial banks, a policy of credit contraction is easier to implement than a policy of credit expansion. Thus, "open market operations can stop booms, but it cannot prevent slumps."
When large-scale selling of securities is made, the prices of securities will adversely affect the assets of banks and upset the borrowing programme of the government.
For the success of open market operations, it is essential that there should be a broad, strong and active securities market. Lack of such a market in a number of countries of the world renders open market policy ineffective.

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