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Which of the following describes the process of sterilization performed by the Reserve Bank of India?
  • a)
    Recovery of loans given to State governments during an emergency situation
  • b)
    Devaluation of Indian currency due to uncertainty in the international market
  • c)
    Operations performed to extract the excess inflow of foreign investments in the economy
  • d)
    It is the process of controlling inflation levels in the economy with the help of repo rates
Correct answer is option 'C'. Can you explain this answer?
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Which of the following describes the process of sterilization perform...
The correct answer is option 'C', which states that sterilization performed by the Reserve Bank of India refers to the operations performed to extract the excess inflow of foreign investments in the economy. Sterilization is an important monetary policy tool used by central banks to maintain stability in the economy, especially in the context of foreign exchange flows.

Sterilization Process:
1. Explanation of Sterilization:
Sterilization refers to the process of neutralizing the impact of foreign exchange inflows on the domestic money supply. When there is excessive inflow of foreign investments or a surge in foreign exchange reserves, it can cause an increase in the money supply, leading to inflationary pressures. To counter this, central banks undertake sterilization operations.

2. Excess Inflow of Foreign Investments:
When there is an excess inflow of foreign investments, it increases the demand for the domestic currency. This increased demand can appreciate the domestic currency, making exports less competitive and imports cheaper. To prevent this appreciation, the central bank intervenes in the foreign exchange market.

3. Intervention by Reserve Bank of India:
The Reserve Bank of India (RBI) intervenes in the foreign exchange market by purchasing the excess foreign currency inflows. This intervention increases the foreign exchange reserves of the country.

4. Sterilization Operations:
To prevent the increase in the money supply due to the inflow of foreign exchange reserves, the RBI undertakes sterilization operations. It sells government securities or conducts open market operations to absorb the excess liquidity from the money market.

5. Absorption of Excess Liquidity:
By selling government securities or conducting open market operations, the RBI absorbs the excess liquidity from the banking system. This helps in maintaining the desired level of liquidity and prevents inflationary pressures.

6. Aim of Sterilization:
The main aim of sterilization is to ensure that the increase in foreign exchange reserves does not lead to excessive money supply growth and inflation. It helps in maintaining stability in the economy and managing the impact of foreign exchange flows.

In conclusion, sterilization performed by the Reserve Bank of India refers to the process of controlling the impact of excess inflow of foreign investments by absorbing the liquidity from the money market. It is an important tool used by the RBI to maintain stability in the economy and manage the impact of foreign exchange flows.
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Which of the following describes the process of sterilization perform...
  • Sterilization is an intervention by the monetary authority of a country in the money market to keep the money supply stable against exogenous or sometimes external shocks. This form of monetary action seeks to limit the effect of inflows and outflows of capital on the money supply. So, option (c) is correct.
  • Sterilization most frequently involves the purchase or sale of financial assets by a central bank and is designed to offset the effect of foreign exchange intervention. The sterilization process is used to manipulate the value of one domestic currency relative to another and is initiated in the foreign exchange market. Sterilization can be achieved through a host of methods, such as an increase in cash reserve ratio (CRR) of commercial banks, or a ceiling on the total credit extended. But the most common method is open market operations (OMOs).
Therefore, the correct answer is (c).
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Which of the following describes the process of sterilization performed by the Reserve Bank of India?a)Recovery of loans given to State governments during an emergency situationb)Devaluation of Indian currency due to uncertainty in the international marketc)Operations performed to extract the excess inflow of foreign investments in the economyd)It is the process of controlling inflation levels in the economy with the help of repo ratesCorrect answer is option 'C'. Can you explain this answer?
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Which of the following describes the process of sterilization performed by the Reserve Bank of India?a)Recovery of loans given to State governments during an emergency situationb)Devaluation of Indian currency due to uncertainty in the international marketc)Operations performed to extract the excess inflow of foreign investments in the economyd)It is the process of controlling inflation levels in the economy with the help of repo ratesCorrect answer is option 'C'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following describes the process of sterilization performed by the Reserve Bank of India?a)Recovery of loans given to State governments during an emergency situationb)Devaluation of Indian currency due to uncertainty in the international marketc)Operations performed to extract the excess inflow of foreign investments in the economyd)It is the process of controlling inflation levels in the economy with the help of repo ratesCorrect answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following describes the process of sterilization performed by the Reserve Bank of India?a)Recovery of loans given to State governments during an emergency situationb)Devaluation of Indian currency due to uncertainty in the international marketc)Operations performed to extract the excess inflow of foreign investments in the economyd)It is the process of controlling inflation levels in the economy with the help of repo ratesCorrect answer is option 'C'. Can you explain this answer?.
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