2022 GS Paper I, all questions

UPSC Prelims 2022 · GS Paper I

Question 3: Economy and Social Development

With reference to the Indian economy, consider the following statements :

  1. 1.If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
  2. 2.If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
  3. 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 ?

a1 and 2 only
b2 and 3 only
c1 and 3 only
d1, 2 and 3

AnswerUPSC’s answer is (b).

RBI buys government securities to inject liquidity, which is the wrong move when inflation is high; to fight inflation it sells securities or raises rates to absorb money. When the rupee is falling fast, RBI sells dollars from its reserves to support it. When US or EU rates fall, capital flows towards higher-yielding India and pushes the rupee up, so RBI buys dollars to curb appreciation and build reserves.

  • 1. High inflation calls for absorbing liquidity, so RBI sells securities rather than buying them.
  • 2. RBI sells dollars to arrest sharp rupee depreciation.
  • 3. Falling foreign rates draw inflows and lift the rupee, so RBI buys dollars to limit appreciation.

How you could have got this

  1. If you were sure statement 1 is not correct, (a), (c) and (d) go: each of them includes 1.

    What you needed to know: High inflation calls for absorbing liquidity, so RBI sells securities rather than buying them.

Only (b) is left. You didn’t need statements 2 or 3.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Wrong. Statement 1 is false: buying securities adds money and feeds inflation.
  • (b) Correct. Selling dollars to defend a falling rupee and buying them against inflows are standard RBI moves.
  • (c) Wrong. Statement 1 is false.
  • (d) Wrong. It includes statement 1, which is false.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2022, General Studies Paper I, Series A. The paper on upsc.gov.in.