Consider the following statements: ...Read more
Sterilization refers to actions taken by the central bank (in this case, the Reserve Bank of India) to manage the impact of foreign capital flows on the domestic money supply. Open Market Operations (OMOs) are one such tool where the central bank buys or sells government securities in the open markeRead more
Sterilization refers to actions taken by the central bank (in this case, the Reserve Bank of India) to manage the impact of foreign capital flows on the domestic money supply. Open Market Operations (OMOs) are one such tool where the central bank buys or sells government securities in the open market to influence liquidity and control inflation or currency appreciation/depreciation. This process helps in managing the domestic monetary base without affecting other macroeconomic variables. Therefore, the correct answer is Conducting ‘Open Market Operations’.
See less
In the recent post-pandemic period, central banks worldwide have raised interest rates to combat inflation, which surged due to heightened fiscal spending during COVID-19 and supply chain issues stemming from the Russia-Ukraine conflict. Therefore, Statement 1 is accurate. The central banks' decisioRead more
In the recent post-pandemic period, central banks worldwide have raised interest rates to combat inflation, which surged due to heightened fiscal spending during COVID-19 and supply chain issues stemming from the Russia-Ukraine conflict. Therefore, Statement 1 is accurate.
The central banks’ decision to increase interest rates aims to raise borrowing costs, leading to a reduction in money supply and, consequently, a decrease in inflation rates. Thus, Statement 2 is also valid.
The rise in interest rates in advanced economies, particularly in the U.S., has negatively impacted the Indian economy, resulting in increased net Foreign Portfolio Investment (FPI) outflows, significant depreciation of the Rupee, declines in foreign exchange reserves, and rising yield rates. This negative impact on the Indian economy is commonly referred to as “Taper Tantrums.” Consequently, this question was posed within this context.
Therefore, the correct answer is Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.
See less