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) 1 and 2 only
- (b) 2 and 3 only ✓ UPSC's answer
- (c) 1 and 3 only
- (d) 1, 2 and 3
Why the answer is (b)
• Statement 1 is wrong: when inflation is high the RBI tightens liquidity by selling government securities (absorbing rupees), not buying them.
• Statement 2 is correct: to arrest a rapidly depreciating rupee the RBI sells dollars from its reserves, increasing dollar supply and supporting the rupee.
• Statement 3 is correct: lower interest rates abroad push capital into India seeking higher returns; the resulting dollar inflows would appreciate the rupee, so the RBI buys dollars to moderate the appreciation and build reserves.
• Hence 2 and 3 only, option (b).
Why the other options are wrong
- (a) 1 and 2 only
- Statement 1 is wrong: high inflation prompts the RBI to sell, not buy, securities.
- (c) 1 and 3 only
- Statement 1 is wrong; statement 3 is correct.
- (d) 1, 2 and 3
- Statement 1 is wrong, so all three cannot be correct.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2022, held on 5 June 2022. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.