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UPSC Prelims 2022 Paper-1 📅 05 Jun, 2022

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?

A
(a) 1 and 2 only
B
(b) 2 and 3 only
C
(c) 1 and 3 only
D
(d) 1, 2 and 3
Result Summary
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UPSC Prelims
2022 • 05 Jun, 2022 • Paper-1
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?
Correct Answer
(b) 2 and 3 only
Statement 1 Analysis: Incorrect. To combat high inflation, the RBI aims to absorb excess liquidity from the market. It achieves this by selling government secur......
Ref/Book : UPSC Prelims 2022
Ref. Subject Economy
Chapter -
Ref. Topic Monetary Policy
Pg. No -
💡 Analysis & Explanation
Statement 1 Analysis ▼
Incorrect. To combat high inflation, the RBI aims to absorb excess liquidity from the market. It achieves this by selling government securities, not buying them.
Statement 2 Analysis ▼
Correct. When the rupee depreciates rapidly against the dollar, the RBI intervenes by selling its dollar reserves. This increases the supply of dollars, helping to stabilize the rupee.
Statement 3 Analysis ▼
Correct. A drop in US or EU interest rates generally leads to capital inflows into emerging markets like India, causing the rupee to appreciate sharply. To prevent excessive appreciation, the RBI purchases these incoming dollars.
Conclusion ▼
Statements 2 and 3 correctly reflect RBI's operational logic.
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