UPSC Prelims 2023 · GS Paper I

Question 24: Economy and Social Development

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

aConducting 'Open Market Operations'

bOversight of settlement and payment systems

cDebt and cash management for the Central and State Governments

dRegulating the functions of Non-banking Financial Institutions

AnswerUPSC’s answer is (a).

Sterilization is a central bank's offsetting of the effect of foreign-exchange inflows or outflows on domestic money supply. When the RBI buys dollars it injects rupees, so it mops up the extra liquidity by selling government securities through open market operations (and through tools such as the Market Stabilisation Scheme). Overseeing payment systems, managing government debt and cash, and regulating NBFCs are regulatory or agency functions, not liquidity offsets.

Why each option is right or wrong

(a) Correct: open market sales absorb liquidity created by forex purchases.
(b) Payment and settlement oversight is a regulatory function.
(c) Debt and cash management is the RBI's agency role for governments.
(d) Regulating NBFCs is a supervisory function.

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

Practise this paper timedPrevious question Next question

Source: UPSC, Civil Services (Preliminary) Examination 2023, General Studies Paper I, Series A. The paper on upsc.gov.in.