Economics • Banking & FinanceHard
In the foreign exchange market operations of the Reserve Bank of India, what does 'Sterilization' mean?
A. Neutralizing the money supply impact of foreign exchange interventions through concurrent open market operations in government securities✓ Correct Answer
B. Imposing capital controls on outward portfolio investments to prevent currency depreciation during global crises
C. Writing off non-performing assets of public sector banks using earnings generated from foreign exchange reserves
D. Fixing the rupee exchange rate against a basket of currencies to eliminate exchange rate volatility completely
💡 Solution & Explanation
Sterilization is a monetary policy action where the central bank neutralizes the liquidity impact of its foreign exchange interventions by conducting open market operations in government securities. Distractors describe capital controls, NPA write-offs, or fixed exchange rate regimes. When the central bank buys foreign currency, it injects rupees; sterilization absorbs this excess liquidity by selling government bonds. This mechanism helps maintain domestic price stability without compromising exchange rate objectives.
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