UPSC Prelims 2022 · Question 3 of 98
UPSC Prelims 2022 question on RBI Inflation Rupee Dollar Operations
- ExamUPSC CSE
- Year2022
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyMedium
- TypeStatement
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?
Show answer
Answer: B. 2 and 3 only
Verdict
Correct statements: 2 and 3 → Option (b).
Statement by statement
Statement 1 – INCORRECT: If RBI feels inflation is too high, it will SELL government securities to suck money out of the system (open market operations), not buy them. Buying securities injects money, which is expansionary.
Statement 2 – CORRECT: If the rupee is rapidly depreciating, RBI will sell dollars in the market to increase the supply of dollars and reduce demand for dollars, causing the rupee price of the dollar to come down.
Statement 3 – CORRECT: If interest rates in the US or EU fall, FIIs will ramp up investments in India. The resultant demand for rupees will cause the rupee to appreciate. In response, RBI will buy dollars and inject rupees into the system to prevent excessive appreciation.