Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
- (a) Conducting 'Open Market Operations' ✓ UPSC's answer
- (b) Oversight of settlement and payment systems
- (c) Debt and cash management for the Central and State Governments
- (d) Regulating the functions of Non-banking Financial Institutions
Why the answer is (a)
• Sterilisation is the RBI's practice of offsetting the effect of its foreign-exchange interventions on domestic money supply.
• When the RBI buys dollars to prevent rupee appreciation, it injects rupees; to 'sterilise' that liquidity it sells government securities through Open Market Operations (or under the Market Stabilisation Scheme), absorbing the extra rupees — option (a).
• Oversight of payment systems, debt and cash management for governments, and regulation of NBFCs are other RBI functions unrelated to sterilisation.
• Sterilisation lets the RBI manage the exchange rate without losing control of inflation.
• Hence option (a).
Why the other options are wrong
- (b) Oversight of settlement and payment systems
- Payment-system oversight is a supervisory function, not sterilisation.
- (c) Debt and cash management for the Central and State Governments
- Government debt management is a banker-to-government role, not sterilisation.
- (d) Regulating the functions of Non-banking Financial Institutions
- NBFC regulation is unrelated to offsetting forex interventions.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2023, held on 28 May 2023. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.