UPSC Prelims 2023 question on Rbi Sterilisation

To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the 'sterilization' of capital flows.

In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily. In theory, this can be achieved in several ways, such as by encouraging private investment overseas, or allowing foreigners to borrow from the local market.

The classical form of sterilization, however, has been through the use of Open Market Operations — that is, selling Treasury bills and other instruments to reduce the domestic component of the monetary base.

Hence option (a) — Conducting Open Market Operations — is the correct answer.