UPSC CSE Prelims
Question 70
With reference to the Indian economy, consider the following statements :
- If the inflation is too high, Reserve Bank of India (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 ?
View correct answer and explanation
Correct answer: B
Correct Option: B (2 and 3 only)
Explanation: RBI typically sells foreign exchange to stem disorderly rupee depreciation and may buy dollars when capital inflows rise after falling developed-market rates.
Statement / Pair / Item-wise Analysis:
1. False / does not qualify - During excessive inflation, RBI generally withdraws liquidity or raises rates; buying Government securities would inject liquidity.
2. True / qualifies - Selling dollar reserves supplies foreign exchange and can support the rupee.
3. True / qualifies - Lower US/EU interest rates can trigger inflows; RBI may buy dollars to limit rupee appreciation/accumulate reserves.
Option-wise Analysis:
A. Incorrect-includes 1 even though During excessive inflation, RBI generally withdraws liquidity or raises rates; buying Government securities would inject liquidity.; omits 3 even though Lower US/EU interest rates can trigger inflows; RBI may buy dollars to limit rupee appreciation/accumulate reserves.
B. Correct-selects exactly the correct statements/items identified above.
C. Incorrect-includes 1 even though During excessive inflation, RBI generally withdraws liquidity or raises rates; buying Government securities would inject liquidity.; omits 2 even though Selling dollar reserves supplies foreign exchange and can support the rupee.
D. Incorrect-includes 1 even though During excessive inflation, RBI generally withdraws liquidity or raises rates; buying Government securities would inject liquidity.