With reference to the Indian economy, consider the following statements :
- 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.
Which of the statements given above are correct ?
Show answer
Answer: B. Statement 1 is wrong: to fight high inflation, RBI sells government securities to suck money out of the system; buying them would add money. Statement 2 is correct: when the rupee falls fast, RBI sells dollars from its reserves to support the rupee. Statement 3 is correct: lower interest rates in the US or EU push foreign money into India, the rupee tends to rise, and RBI buys dollars to absorb the inflow. So 2 and 3.
Watch for: Mixing up the direction of open market operations: selling bonds absorbs liquidity, buying bonds releases it.
Why the other options are wrong
- A. Wrong because buying securities injects money and would worsen inflation.
- C. Wrong because statement 1 is incorrect.
- D. Wrong because statement 1 is incorrect.
Source to check: NCERT Class 12 Macroeconomics, Chapter 3 (Money and Banking) on open market operations; RBI website (Monetary Policy and Forex Operations FAQs)
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.