Question 38 from UPSC CSE 2023 - Economics

Question

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

IASCODEX · Accepted Answer

Correct Option: A. Conducting 'Open Market Operations'

Strategy: Focus on the keyword 'sterilization'--in economics, this refers to central bank actions to offset the effects of capital flows on domestic money supply. The only option directly linked to counteracting excess money in the system is 'Open Market Operations', where the RBI buys or sells government securities to absorb or inject liquidity. Other activities are regulatory or support functions but are not aimed at monetary sterilization.

Key Info: ## Sterilization in Monetary Policy
Sterilization is a monetary policy operation conducted by central banks to neutralize the impact of capital flows on domestic money supply. When large foreign capital inflows occur, a central bank may end up accumulating foreign currency assets, which increases the domestic money supply and can cause inflation or currency appreciation.

To offset this effect, the Reserve Bank of India (RBI) conducts Open Market Operations (OMOs):
*   **Selling securities** -- RBI absorbs excess liquidity, thereby 'sterilizing' the capital inflow's impact.
*   **Buying securities** -- RBI injects liquidity.

OMOs are thus the main sterilization tool.

## Other RBI Functions (Not Sterilization)
*   **Oversight of settlement and payment systems** -- Involves ensuring safe and efficient financial transactions.
*   **Debt and cash management for governments** -- Refers to RBI acting as a banker and adviser to the government.
*   **Regulating Non-banking Financial Institutions (NBFIs)** -- A supervisory activity to ensure sectoral stability, with no direct link to the sterilization process.

IASCODEX · Answer

Option B: Oversight of settlement and payment systems

IASCODEX · Answer

Option C: Debt and cash management for the Central and State Governments

IASCODEX · Answer

Option D: Regulating the functions of Non-banking Financial Institutions