Question
With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
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?
Explanation
Statement 1 is incorrect: To fight high inflation, RBI tightens money supply — it sells government securities to suck out excess liquidity, it does not buy them.
Statement 2 is correct: When the rupee falls too fast, RBI defends it by selling dollars from its reserves to boost dollar supply.
Statement 3 is correct: If US or EU rates fall, foreign investors chase better returns in India, pushing the rupee up — RBI then buys dollars to prevent excessive rupee appreciation and to rebuild reserves.