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
The correct answer is (a).
Sterilization is a monetary action used by central banks to offset the effect of inflows and outflows of capital on the money supply. In India, the Reserve Bank of India (RBI) conducts open market operations (OMOs) to sterilize the impact of capital inflows. OMOs involve the buying and selling of government securities in the open market. When the RBI buys government securities, it injects liquidity into the economy. When the RBI sells government securities, it withdraws liquidity from the economy.
The RBI also uses other tools to sterilize the impact of capital inflows, such as the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). The CRR is the percentage of deposits that banks are required to hold with the RBI. The SLR is the percentage of deposits that banks are required to invest in government securities. By increasing the CRR or the SLR, the RBI can withdraw liquidity from the economy.
The RBI’s sterilization operations are aimed at maintaining price stability and financial stability. By sterilizing the impact of capital inflows, the RBI can prevent the money supply from growing too rapidly, which could lead to inflation. The RBI’s sterilization operations also help to stabilize the exchange rate.
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