Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
- A.Conducting "Open Market Operations"
- B.Oversight of settlement and payment systems
- C.Debt and cash management for the Central and State Governments
- D.Regulating the functions of Non-banking Financial Institutions
▶ Answer & Explanation
Correct answer: A. Conducting "Open Market Operations"
Sterilization by the central bank refers to measures taken to counteract the monetary impact of foreign exchange interventions. When the RBI buys foreign currency, it injects domestic liquidity. To absorb this excess liquidity and prevent inflation, the RBI conducts Open Market Operations, typically selling government securities to withdraw money from the system. This process helps maintain monetary stability by neutralizing the effects of forex market operations on the domestic money supply.
Source: UPSC gs1 2023