Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?

UPSC Prelims 2023 Question:

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

Correct Answer: Option a) Conducting ‘Open Market Operations’

Learn more about Open Market Operations from the given below explanation.

Explanation:

Sterilization is an action taken by the Central Bank (such as RBI in India) to counterbalance the effects of foreign exchange interventions on domestic money supply and inflation. It is done to neutralise the impact of inflows or outflows of foreign exchange reserves on the domestic monetary system.

Open Market Operations

Open Market Operations (OMOs) are one of the tools used by the RBI for sterilization. OMOs are the purchase or sale of government securities by the Central Bank in the open market in order to regulate the money supply in the economy. When the RBI buys government securities, it injects liquidity into the economy, while when it sells these securities, it absorbs liquidity from the economy.

Through OMOs, the RBI can either inject or drain liquidity from the banking system in order to maintain price stability and promote economic growth. This is done to neutralize the inflationary or deflationary impact of foreign exchange interventions on the domestic economy.

Therefore, option (a) is the correct answer.

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