UPSC Previous Year Question | Prelims GS | 2022

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?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

Correct Answer

2 and 3 only

Explanation

Statement 1 is incorrect: to control high inflation RBI sells (not buys) government securities to suck out liquidity. Statement 2 is correct: RBI sells dollars to support a depreciating rupee. Statement 3 is correct: falling US/EU interest rates make the rupee relatively attractive, prompting RBI to buy dollars to prevent excessive appreciation.

Topics: economy, foreign exchange intervention, monetary policy, rbi government securities and dollars