Q3. 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?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Answer – B
- Statement 1 is incorrect: If the inflation is too high, the Reserve Bank of India (RBI) is likely to reduce the money supply in the economy to control inflation. Thus, RBI sells the government securities so as to suck the excess of money supply from the economy and to control the inflation.
- Statement 2 is correct: The Reserve Bank of India intervenes in the currency market to support the rupee as a weak domestic unit can increase a country’s import bill. There are a variety of methods by which RBI intervenes. It can intervene directly in the currency market by buying and selling dollars. If RBI wishes to prop up the rupee value, then it can sell the dollar, and when it needs to bring down the rupee value, it can buy dollars
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