Question

Identify and briefly describe the ways that may be used by the Central Bank of Oman to influence money supply.  

Answer 1

The way used by the Central Bank of Oman to influence money supply are -

Reserve Requirements: Central banks usually set up the minimum amount of reserves that must be held by a commercial bank. By changing the required amount, the central bank can influence the money supply in the economy. If monetary authorities increase the required reserve amount, commercial banks find less money available to lend to their clients and thus, money supply decreases.The CBO also employs this instrument and immobilises a fraction of the banking system resources by prescribing that banks have to compulsorily maintain a portion of the deposit base by way of cash balances and/or securities with the CBO.

Interest rate adjustment A central bank can influence interest rates by changing the discount rate. The discount rate (base rate) is an interest rate charged by a central bank to banks for short-term loans. CBO also extends the facility of discounting/rediscounting commercial papers up to specified maturities to the Licensed banks in the Sultanate.

Certificates of Deposit: Certificates of Deposit (CD) issued by the CBO to licensed banks. They are short-term instruments, to absorb liquidity when CBO considers it appropriate. The primary objective of CDs is to mop up the excess liquidity in the banking system, and to ensure that the inter-bank money market functions in a stable and orderly fashion.CDs are issued in different short term maturities, at the discretion of the CBO and as considered appropriate for attaining the monetary policy objectives.

Open market operations - The central bank can either purchase or sell securities issued by the government to affect the money supply. For example, central banks can purchase government bonds. As a result, banks will obtain more money to increase the lending and money supply in the economy.

Repo/ Reverse Repo operations:   Central banks extend the facilities of repo and reverse repo to banks to enable them to borrow short term funds/ to invest short term surpluses against approved securities which are used as collaterals. These instruments are employed by a large number of central banks across the world to affect the systemic liquidity.