With reference to the Indian economy, consider the following statements: 1. If the inflation is too high,…
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?
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Solution
Statement 1 is incorrect: To control high inflation, RBI sells securities (sucks out liquidity). Statement 2 is correct: To support rupee, RBI sells dollars. Statement 3 is correct: Lower foreign rates attract capital to India, leading RBI to buy excess dollars to prevent rupee appreciation.