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 below is/are correct?

QUESTION

Medium

Economy

Prelims 2022

With reference to the Indian economy, consider the following statements:

If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
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 below is/are correct?

Select an option to attempt

Explanation

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further.

Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee.

Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.

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