{"id":92011,"date":"2025-06-01T11:12:05","date_gmt":"2025-06-01T11:12:05","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=92011"},"modified":"2025-06-01T11:12:05","modified_gmt":"2025-06-01T11:12:05","slug":"with-reference-to-the-indian-economy-consider-the-following-statement-3","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/","title":{"rendered":"With reference to the Indian economy, consider the following statement"},"content":{"rendered":"<p>With reference to the Indian economy, consider the following statements:<\/p>\n<ul>\n<li>If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.<\/li>\n<li>If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.<\/li>\n<li>If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.<\/li>\n<\/ul>\n<p>Which of the statements given above are correct ?<\/p>\n<p>[amp_mcq option1=&#8221;1 and 2 only&#8221; option2=&#8221;2 and 3 only&#8221; option3=&#8221;1 and 3 only&#8221; option4=&#8221;1, 2 and 3&#8243; correct=&#8221;option2&#8243;]<\/p>\n<div class=\"psc-box-pyq-exam-year-detail\">\n<div class=\"pyq-exam\">\n<div class=\"psc-heading\">This question was previously asked in<\/div>\n<div class=\"psc-title line-ellipsis\">UPSC IAS &#8211; 2022<\/div>\n<\/div>\n<div class=\"pyq-exam-psc-buttons\"><a href=\"\/pyq\/pyq-upsc-ias-2022.pdf\" target=\"_blank\" class=\"psc-pdf-button\" rel=\"noopener\">Download PDF<\/a><a href=\"\/pyq-upsc-ias-2022\" target=\"_blank\" class=\"psc-attempt-button\" rel=\"noopener\">Attempt Online<\/a><\/div>\n<\/div>\n<section id=\"pyq-correct-answer\">\nStatement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations &#8211; OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity.<br \/>\nStatement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee&#8217;s value or reduce the rate of depreciation.<br \/>\nStatement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply.<br \/>\n<\/section>\n<section id=\"pyq-key-points\">\nRBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.<br \/>\n<\/section>\n<section id=\"pyq-additional_information\">\nRBI&#8217;s monetary policy decisions are guided by the objectives of price stability while keeping in mind the objective of growth. Exchange rate management is also a crucial function to ensure external sector stability, although India follows a managed float system, not a fixed exchange rate.<br \/>\n<\/section>\n","protected":false},"excerpt":{"rendered":"<p>With reference to the Indian economy, consider the following statements: If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. If interest rates in the USA or European Union were to fall, that &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"With reference to the Indian economy, consider the following statement\" class=\"read-more button\" href=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/#more-92011\">Detailed Solution<span class=\"screen-reader-text\">With reference to the Indian economy, consider the following statement<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1092],"tags":[1108,1226],"class_list":["post-92011","post","type-post","status-publish","format-standard","hentry","category-upsc-ias","tag-1108","tag-external-sector-of-economy","no-featured-image-padding"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>With reference to the Indian economy, consider the following statement<\/title>\n<meta name=\"description\" content=\"Statement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations - OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity. Statement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee&#039;s value or reduce the rate of depreciation. Statement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply. RBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"With reference to the Indian economy, consider the following statement\" \/>\n<meta property=\"og:description\" content=\"Statement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations - OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity. Statement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee&#039;s value or reduce the rate of depreciation. Statement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply. RBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/\" \/>\n<meta property=\"og:site_name\" content=\"MCQ and Quiz for Exams\" \/>\n<meta property=\"article:published_time\" content=\"2025-06-01T11:12:05+00:00\" \/>\n<meta name=\"author\" content=\"rawan239\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"rawan239\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"With reference to the Indian economy, consider the following statement","description":"Statement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations - OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity. Statement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee's value or reduce the rate of depreciation. Statement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply. RBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/","og_locale":"en_US","og_type":"article","og_title":"With reference to the Indian economy, consider the following statement","og_description":"Statement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations - OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity. Statement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee's value or reduce the rate of depreciation. Statement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply. RBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.","og_url":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/","og_site_name":"MCQ and Quiz for Exams","article_published_time":"2025-06-01T11:12:05+00:00","author":"rawan239","twitter_card":"summary_large_image","twitter_misc":{"Written by":"rawan239","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/","url":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/","name":"With reference to the Indian economy, consider the following statement","isPartOf":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/#website"},"datePublished":"2025-06-01T11:12:05+00:00","dateModified":"2025-06-01T11:12:05+00:00","author":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/5807dafeb27d2ec82344d6cbd6c3d209"},"description":"Statement 1 is incorrect. If inflation is too high, the Reserve Bank of India (RBI) uses monetary policy tools to reduce liquidity and curb aggregate demand. Buying government securities (Open Market Operations - OMO purchase) injects liquidity into the market. To control inflation, RBI would *sell* government securities (OMO sale) to absorb liquidity. Statement 2 is correct. If the rupee is rapidly depreciating, it means its value is falling relative to foreign currencies (like the US dollar). This is often due to high demand for foreign currency or low supply. To counter this, RBI can intervene in the foreign exchange market by selling dollars from its foreign exchange reserves. This increases the supply of dollars, which helps to stabilize the rupee's value or reduce the rate of depreciation. Statement 3 is correct. If interest rates in the USA or European Union fall, financial investments in those regions may become less attractive compared to India, assuming India offers relatively better returns. This encourages foreign investors to move capital to India, increasing capital inflows (e.g., FII\/FPI investments). These inflows are often denominated in foreign currency (like USD) and converted to rupees, leading to increased supply of foreign currency in the domestic market. This would put pressure on the rupee to appreciate. To prevent excessive or rapid appreciation and maintain exchange rate stability, RBI may buy dollars (and sell rupees) from the market, thereby absorbing the excess foreign currency supply. RBI uses Open Market Operations (buying\/selling government securities) to manage domestic liquidity and influence interest rates. RBI intervenes in the foreign exchange market (buying\/selling foreign currency) to manage the value of the rupee and control volatility.","breadcrumb":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-3\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/exam.pscnotes.com\/mcq\/"},{"@type":"ListItem","position":2,"name":"UPSC IAS","item":"https:\/\/exam.pscnotes.com\/mcq\/category\/upsc-ias\/"},{"@type":"ListItem","position":3,"name":"With reference to the Indian economy, consider the following statement"}]},{"@type":"WebSite","@id":"https:\/\/exam.pscnotes.com\/mcq\/#website","url":"https:\/\/exam.pscnotes.com\/mcq\/","name":"MCQ and Quiz for Exams","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/exam.pscnotes.com\/mcq\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/5807dafeb27d2ec82344d6cbd6c3d209","name":"rawan239","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/761a7274f9cce048fa5b921221e7934820d74514df93ef195a9d22af0c1c9001?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/761a7274f9cce048fa5b921221e7934820d74514df93ef195a9d22af0c1c9001?s=96&d=mm&r=g","caption":"rawan239"},"sameAs":["https:\/\/exam.pscnotes.com"],"url":"https:\/\/exam.pscnotes.com\/mcq\/author\/rawan239\/"}]}},"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts\/92011","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/comments?post=92011"}],"version-history":[{"count":0,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts\/92011\/revisions"}],"wp:attachment":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/media?parent=92011"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/categories?post=92011"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/tags?post=92011"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}