Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
- A.Conducting 'Open Market Operations'
- B.Oversight of settlement and payment systems
- C.Debt and cash management for the Central and State Governments
- D.Regulating the functions of Non-banking Financial Institutions
Correct answer
Explanation
The correct answer is A, Conducting 'Open Market Operations'. Sterilization means cancelling out the effect of foreign exchange operations on the domestic money supply, and the RBI does it mainly through open market operations. When dollars flow in and the RBI buys them to stop the rupee rising too fast, it releases rupees into the system, which can push up inflation. To neutralise this, it sells government securities and pulls the same amount of rupees back. When it sells dollars, it can buy securities to put rupees back in. Other tools used for this are the Market Stabilisation Scheme (from 2004), reverse repo and the Standing Deposit Facility. Option B is wrong because oversight of payment and settlement systems is about safe transactions, not the money supply. Option C is wrong because debt and cash management is the RBI's role as banker to the governments. Option D is wrong because regulating NBFCs is a supervisory function. Exam tip: buying dollars adds rupees, an OMO sale takes them back, and together that is sterilization.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
Show answer
Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
Show answer
UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
Show answer
The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
Read the full explanation →