Civil Services Prep

Prelims 2023 · Economy · Question 44

Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?

  1. Conducting 'Open Market Operations'
  2. Oversight of settlement and payment systems
  3. Debt and cash management for the Central and State Governments
  4. Regulating the functions of Non-banking Financial Institutions

Answer

Conducting 'Open Market Operations'

  • (a) Conducting 'Open Market Operations': Sterilization means offsetting excess liquidity, often created by forex interventions, by buying/selling government securities. OMOs are a standard sterilization tool. ✅
  • (b) Oversight of settlement and payment systems: This is a regulatory/supervisory function of RBI, not a liquidity-absorption operation. Not sterilization. ❌
  • (c) Debt and cash management for the Central and State Governments: This relates to RBI's role as banker/debt manager to governments. Not sterilization. ❌
  • (d) Regulating the functions of Non-banking Financial Institutions: This is financial sector regulation, unrelated to neutralizing liquidity. Not sterilization. ❌

Answer: (a)

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