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UPSC PYQPrelims 2022

Civil Services Examination · Question 3

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?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3
Show answer & explanation

Answer: (B) 2 and 3 only

Explanation

To fight inflation the RBI sells (not buys) G-secs to absorb liquidity. It sells dollars to support a falling rupee, and it buys dollars when lower foreign rates bring capital inflows that push the rupee up.