Q3.
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?
Answer
B
Explanation
If RBI feels inflation is too high, it will SELL government securities to suck money out of the system — Statement 1 is incorrect. If the rupee is rapidly depreciating, RBI will sell dollars in the market to increase the supply of dollars and demand for rupees, stabilising the exchange rate — Statement 2 is correct. If interest rates in the US or EU fall, FIIs will ramp up investments in India, causing the rupee to appreciate. In response, RBI will buy dollars and inject rupees into the system — Statement 3 is correct.