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 policy tool used by central banks to offset the impact of changes in the money supply caused by capital flows. The most common form of sterilization is open market operations, which involve the central bank buying or selling government bonds. When the central bank buys bonds, it injects money into the economy, and when it sells bonds, it withdraws money from the economy.
The Reserve Bank of India (RBI) uses open market operations to sterilize the impact of capital flows. For example, if there is a large inflow of foreign capital, the RBI may buy government bonds in order to withdraw money from the economy and prevent inflation.
The other options are not considered to be part of sterilization. Oversight of settlement and payment systems is a function of the RBI’s Payment and Settlement Systems Department. Debt and cash management for the Central and State Governments is a function of the RBI’s Department of Government and Public Debt. Regulating the functions of Non-banking Financial Institutions is a function of the RBI’s Department of Non-banking Regulation and Supervision.