Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
A
Conducting 'Open Market Operations'
Correct 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
Explanation
Sterilization is the core concept where the RBI neutralizes the impact of foreign exchange inflows or outflows on the domestic money supply, primarily by conducting Open Market Operations (OMO) to sell or buy government securities. This ensures that excess liquidity created by the purchase of foreign currency does not lead to domestic inflation or currency instability. Option (c) is the most tempting wrong choice, but it refers to the RBI’s routine role as a fiscal agent for the government rather than a specific monetary intervention aimed at offsetting external capital shocks.
Monetary PolicySterilizationReserve Bank of IndiasterilizationOpen Market Operations