[Solved] With reference to the Indian economy consider the following statements: If the inflation is too high, Reserve bank of Indian (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 above are correct?

Q3) With reference to the Indian economy consider the following statements:

1. If the inflation is too high, Reserve bank of Indian (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: 2

• Government Securities are debt products that the government issues in order to borrow money. Treasury bills, which are short-term instruments with maturities of 91 days, 182 days, or 364 days, and dated securities, which are long-term instruments with maturities ranging from 5 years to 40 years, are the two main kinds.
• The Reserve Bank of India (RBI) periodically intervenes in the debt market to affect inflation and interest rates.
• If the RBI decides that the rate of inflation is too high, it will sell government securities and drain the economy of its funds. The economy’s interest rates will rise as a result of this action, and businesses will reduce loan-financed capital expenditures, decreasing the demand for money.
• Depreciation occurs in a free-floating exchange rate system when there is a surplus of demand for dollars relative to supply. In order to increase the quantity of dollars in the economy, RBI is therefore likely to sell dollars.
• FIIs would increase their investments in India if interest rates in the US or the EU declined. The rupee will strengthen as a result of the increased demand for them. In retaliation, the RBI will purchase dollars and add rupees to the system.