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

Question

(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

Answer 1

Answer:(a) Conducting 'Open Market Operations'

Explanation:

Sterilization is a monetary policy tool used by central banks to offset the impact of foreign exchange interventions on the money supply. When a central bank intervenes in the foreign exchange market by buying or selling foreign currency, it can result in an increase or decrease in the domestic money supply. To prevent any adverse effects on domestic monetary conditions, the central bank engages in sterilization.

One of the key methods of sterilization used by the Reserve Bank of India is conducting 'Open Market Operations' (OMOs). In OMOs, the central bank buys or sells government securities in the open market to influence the liquidity in the banking system. When the Reserve Bank of India sells government securities, it absorbs liquidity from the system, reducing the money supply. Conversely, when it buys government securities, it injects liquidity, increasing the money supply. These actions help in sterilizing the impact of foreign exchange interventions and managing the domestic money market.