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 ?

Question

Question

This question was previously asked in

UPSC Civil Services Exam Official 2022 Prelims General Studies held on 5th June

Answer 1

The correct answer is 2 and 3 only.

Key Points

Government security (G-Sec):
- It is a tradeable instrument issued by the central government or state government.
- It acknowledges the government’s debt obligations.
- The G-Secs issuances are managed by the RBI, who on behalf of the Centre, regularly conducts G-Sec auctions every Friday.
- State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments.
- If the inflation is high RBI tries to reduce the liquidity of the market, by selling Government securities to the public via open market operation. Hence, Statement 1 is not correct.
Rupee depreciation:
- It means to fall in the value of the rupee with respect to the dollar.
- In a free-floating exchange rate regime, depreciation takes place when the demand for the dollar is more than the supply. Hence, RBI is likely to sell dollars in the economy to increase the supply of the dollar. Hence, Statement 2 is correct.
If the interest rate in US and EU falls, there will be an inflow of dollars in the Indian market, leading to an appreciation of the rupee.
To reduce the supply of dollars in the economy, RBI will like to buy the dollars from the market. Hence, Statement 3 is correct.