RBI's monetary policy responses to inflation, currency depreciation, and global interest rates
Question
With reference to the Indian economy consider the following statements: Which of the statements given above are correct?
- 1.
If the inflation is too high, 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.
Options
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Explanation
Statement 1 is incorrect; to curb high inflation, the RBI will sell government securities to absorb excess liquidity, not buy them. Statement 2 is correct; selling dollars increases foreign exchange supply, stabilizing a rapidly depreciating rupee. Statement 3 is correct; falling US/EU interest rates cause capital inflows into India (causing rupee appreciation), inducing the RBI to buy dollars to absorb the influx and prevent excessive appreciation.
Answer: (b).
Question details
Year
2022
Paper
GS Paper 1
Question
Q3
Subject
Economy
Sub-topic
Banking & RBI
Type
Statement-based
Difficulty
Hard
Nature
Hybrid
Source hint
NCERT Economy Cl.12 Ch.3 / RBI Forex Interventions 2022
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