gs1medium
With reference to the Indian economy, consider the following statements:
- 1.If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities.
- 2.If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
- 3.If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above is/are correct ?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
▶ Answer & Explanation
Correct answer: B. 2 and 3 only
When inflation is high, the RBI aims to reduce the money supply, which it does by selling government securities, not buying them. Selling securities withdraws money from circulation. If the rupee is depreciating, the RBI intervenes by selling its foreign exchange reserves (like dollars) to increase the demand for rupees and stabilize the currency. A fall in interest rates in major economies like the US or EU can make investments in those regions less attractive, potentially leading to capital outflows from India or encouraging the RBI to buy dollars to avoid excessive rupee appreciation.
Source: UPSC gs1 2022