[Solved] Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’? Conducting ‘Open Market Operations’ Oversight of settlement and payment systems Debt and cash management for the Central and State Governments Regulatmg the functions of Non- banking Financial Institutions

Q74. Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’?

1. Conducting ‘Open Market Operations’
2. Oversight of settlement and payment systems
3. Debt and cash management for the Central and State Governments
4. Regulatmg the functions of Non- banking Financial Institutions

Answer: 1

Sterilization: Actions taken by the RBI to neutralize the impact of foreign exchange interventions on the domestic money supply.

Open Market Operations (OMO): A tool used by the RBI to manage liquidity by buying or selling government securities.

Impact of OMO on Money Supply:

Buying government securities – Increases money supply.

Selling government securities – Reduces money supply.

Sterilization and OMO:

The RBI might use OMO to buy foreign currency, unintentionally increasing the money supply.

To counter this, sterilization involves selling government securities in the open market, effectively mopping up the excess liquidity.

Why is this important?

Sterilization helps the RBI maintain control over the money supply and prevent unwanted fluctuations. This, in turn, contributes to price stability and overall economic stability.