This is a classic 'Sitter' from the static portion of Macroeconomics. It tests the fundamental mechanism of how a Central Bank manages the 'Impossible Trinity' (Exchange Rate vs. Inflation). If you missed this, your core reading of NCERT or standard reference books (Vivek Singh/Singhania) is superficial.
How this question is built
This question can be broken into the following sub-statements.
Tap a statement sentence to jump into its detailed analysis.
Statement 1
Are Open Market Operations conducted by the Reserve Bank of India considered part of sterilization?
Origin: Direct from books
Fairness: Straightforward
Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
Presence: 5/5
“To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the "sterilization" of capital flows. In a successful sterilization operation, the domestic component of the monetary base/ money supply is reduced to offset the inflow of capital, at least temporarily. In theory, this can be achieved by encouraging private investment overseas, or allowing foreigners to borrow from the local market. But the classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other securities by RBI to reduce the domestic component of the monetary base/ money supply. [Reverse repos and outright Open market operation sales demanded the availability of adequate stock of Govt. securities with the RBI, which became a constraining factor in sterilisation operations as the volume of capital inflows expanded.”
Why this source?
- Defines sterilization as reducing the domestic monetary base to offset capital inflows and names open market operations as the classical form.
- Specifically cites RBI selling Treasury bills and other securities as the sterilization action.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
Presence: 4/5
“Open Market Operations (OMO): Sale or purchase of government securities by RBI in the open market (secondary market) to banks/financial institutions for absorption and injection of durable liquidity in the economy is called open market operations. If the inflation in the economy is high then, to control the inflation RBI reduces the money supply by selling government securities. And if RBI wants to increase the money supply then it buys government securities from the banks/financial institutions and pays them money in exchange of government securities which ultimately increases the money supply in the economy. There are two types of Open Market Operations (OMOs). • Outright OMOs: They are permanent in nature.”
Why this source?
- Defines Open Market Operations as RBI buying/selling government securities to absorb or inject durable liquidity.
- Explains that selling government securities reduces the money supply, the mechanism used in sterilization.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 3. Open Market Operations > p. 167
Presence: 4/5
“Open Market Operations (OMOs) refer to the buying and selling of G-Secs in the open market (i.e. in the public) by the RBI. The RBI, by selling G-Secs, reduces the money supply by withdrawing cash balances from within the economic controls, thereby controlling inflation.”
Why this source?
- States that RBI selling G‑Sec reduces money supply by withdrawing cash balances from the economy.
- Provides the operational effect (withdrawal of liquidity) that sterilization aims to achieve.
Statement 2
Is oversight of settlement and payment systems by the Reserve Bank of India considered part of sterilization?
Origin: Weak / unclear
Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Strength: 5/5
“The Reserve Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation and Overseeing the Payments System and onto developing the financial markets.”
Why relevant
Lists RBI core functions as separate items: Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System—implying oversight of payments is a distinct function.
How to extend
A student could infer that since 'monetary policy' and 'overseeing the payments system' are separately named, oversight is likely not the same as sterilization (a monetary policy tool).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
Strength: 5/5
“To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the "sterilization" of capital flows. In a successful sterilization operation, the domestic component of the monetary base/ money supply is reduced to offset the inflow of capital, at least temporarily. In theory, this can be achieved by encouraging private investment overseas, or allowing foreigners to borrow from the local market. But the classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other securities by RBI to reduce the domestic component of the monetary base/ money supply. [Reverse repos and outright Open market operation sales demanded the availability of adequate stock of Govt. securities with the RBI, which became a constraining factor in sterilisation operations as the volume of capital inflows expanded.”
Why relevant
Defines 'sterilization' as monetary operations to offset capital inflows, typically via open market operations (selling treasury bills/securities).
How to extend
A student can use this definition to check whether payment-system oversight involves selling/buying securities — if not, it likely isn't sterilization.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
Strength: 4/5
“The central bank of any country is usually the driving force in the development of national payment systems. The Reserve Bank of India (RBI) as the central bank of India has been playing this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country. In India, the payment and settlement systems are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act). In terms of Section 4 of the PSS Act, no person other than RBI can commence or operate a payment system in India unless authorised by RBI.”
Why relevant
Describes RBI's developmental and regulatory role specifically in payment and settlement systems under the PSS Act, showing oversight is a regulatory/developmental activity.
How to extend
A student could contrast regulatory/developmental activities with the transactional asset-operations described for sterilization to judge they are different categories.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.3 MONEY CREATION BY BANKING SYSTEM > p. 39
Strength: 4/5
“Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves. Assets = Reserves + Loans Liabilities for any firm are its debts or what it owes to others.”
Why relevant
Explains that commercial-bank reserves with the RBI can be held partly in financial instruments (bonds and T-bills) issued by the RBI — the very instruments used in sterilization.
How to extend
A student could note sterilization uses securities/reserve-management instruments, and then ask whether payment-system oversight routinely involves those instruments; absence would argue against treating oversight as sterilization.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Major Acts Administered by the RBI > p. 173
Strength: 3/5
“• The Reserve Bank of India Act, 1934
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Public Debt Act, 1944
• Government Securities Act, 2006
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act, 2002
• Credit Information Companies (Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007
• Factoring Regulation Act, 2011”
Why relevant
Shows RBI administers the Payment and Settlement Systems Act, 2007, indicating oversight is a statutory regulatory role rather than an open-market monetary operation.
How to extend
A student could extend this by checking definitions of statutory regulatory roles versus monetary policy tools to distinguish oversight from sterilization.
Statement 3
Is debt and cash management for the Central and State Governments carried out by the Reserve Bank of India considered part of sterilization?
Origin: Weak / unclear
Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
Strength: 5/5
“To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the "sterilization" of capital flows. In a successful sterilization operation, the domestic component of the monetary base/ money supply is reduced to offset the inflow of capital, at least temporarily. In theory, this can be achieved by encouraging private investment overseas, or allowing foreigners to borrow from the local market. But the classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other securities by RBI to reduce the domestic component of the monetary base/ money supply. [Reverse repos and outright Open market operation sales demanded the availability of adequate stock of Govt. securities with the RBI, which became a constraining factor in sterilisation operations as the volume of capital inflows expanded.”
Why relevant
Gives a working definition of 'sterilization' as central bank operations (especially selling treasury bills and securities via open market operations) that reduce the domestic monetary base to offset inflows.
How to extend
A student could use this definition plus knowledge of whether a given debt/cash operation involves outright sales or repos of government securities to judge if it is a sterilizing action.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Management of Foreign Exchange Reserves > p. 69
Strength: 5/5
“WMAs are not used to fund Fiscal deficit. • Besides it arranges for investments of surplus cash balances of the Governments as a portfolio manager.• The RBI also acts as advisor to the Government, whenever called upon to do so, on monetary and banking related matters.• 7. Debt Manager of Central and State governments The RBI manages the public debt and issues new loans on behalf of the Central and State Governments. The RBI's debt management policy aims at minimising the cost of borrowing, reducing risk, smoothening the maturity structure of debt. • 8.”
Why relevant
States RBI 'manages the public debt' and 'arranges for investments of surplus cash balances' for governments—showing RBI conducts debt and cash operations on behalf of the state.
How to extend
Combine this with the sterilization rule: if RBI's debt/cash management entails selling or absorbing liquidity through securities, those operations could have sterilizing effects.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.5 Government Securities > p. 46
Strength: 4/5
“Cash Management Bills (CMB): In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days and are traded in money market.• 3. Dated Securities: These are basically long-term securities issued by the Central Govt. and generally have a tenor of 5 years to 40 years.”
Why relevant
Describes Cash Management Bills (short-term T-bill–like instruments) used to meet temporary government cash mismatches — a tool of cash management.
How to extend
A student could ask whether issuance or RBI transactions in CMBs alter the domestic monetary base (e.g., absorb liquidity) and thus function like sterilization operations.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Strength: 4/5
“The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935. The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.”
Why relevant
Notes RBI historically took over management of government accounts and public debt, indicating the central bank is the operational agent for such fiscal instruments.
How to extend
Using this, a student can infer the RBI has the capacity to use debt-management instruments in ways that may be sterilizing (if they affect money supply via OMOs).
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Main Features > p. 82
Strength: 3/5
“through tax revenues, the necessary adjustment has to come from a reduction in expenditure. • 3. The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.• 4. The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.• 5. The Reserve Bank of India must not subscribe to the primary issues of central government securities from the year 2006-07.• 6. Measures to be taken to ensure greater transparency in fiscal operations.• 7.”
Why relevant
States legal/operational constraints: central government shall not borrow from RBI except temporary advances and RBI must not subscribe to primary issues since 2006–07—pointing to institutional limits on direct monetization.
How to extend
A student could combine this with the sterilization definition to reason that some debt/cash operations (direct RBI financing) are constrained, so only certain debt-management transactions can act as sterilization.
Statement 4
Is regulating the functions of Non-banking Financial Institutions by the Reserve Bank of India considered part of sterilization?
Origin: Weak / unclear
Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the various functions of RBI: > p. 66
Strength: 5/5
“2. Regulation and Supervision of the Banking and Non-Banking Financial Institutions The objective of this function is to protect the interest of depositors through an effective prudential regulatory framework for orderly development and conduct of banking operations and liquidity and solvency of banks and to maintain overall financial stability through various policy measures. RBI derives these powers from the RBI Act 1934 and the Banking Regulation Act 1949. RBI's regulatory and supervisory functions extend not only to the Indian banking system but also to the Non-Banking Financial Institutions. The following are various functions of RBI regarding commercial banks, cooperative banks, regional rural banks, Financial Institutions, NBFCs, Primary Dealers, CICs etc:”
Why relevant
States RBI's regulatory and supervisory functions explicitly extend to Non‑Banking Financial Institutions (NBFCs).
How to extend
A student could contrast this stated regulatory role with a standard definition of 'sterilization' (monetary operations to offset foreign inflows) to judge whether regulatory oversight is the same kind of activity.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
Strength: 5/5
“The Reserve Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation and Overseeing the Payments System and onto developing the financial markets.”
Why relevant
Notes RBI's focus on 'core central banking functions like Monetary Policy, Bank Supervision and Regulation', listing monetary policy separately from supervision/regulation.
How to extend
One could use the separation to infer that regulatory actions and monetary policy operations (including sterilization) are distinct categories and then check whether regulation of NBFCs involves open‑market or reserve‑affecting operations.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 115
Strength: 4/5
“• 5. The Reserve Bank of India regulates the commercial banks in matters of [2013] • (i) Liquidity of assets• (ii) Branch expansion• (iii) Merger of banks• (iv) Winding-up of banks Select the correct answer using the codes given below. • (a) (i) & (iv) only• (b) (ii), (iii) & (iv) only• (c) (i), (ii) & (iii) only• (d) (i), (ii), (iii) & (iv)• 6. In India, deficit financing is used for raising resources for [2013] • (a) Economic development• (b) Redemption of public debt• (c) Adjusting the balance of payments• (d) Reducing the foreign debt• 7.”
Why relevant
Example question lists 'liquidity of assets' as a matter RBI regulates for banks, connecting RBI regulation to liquidity management.
How to extend
A student could extend this by asking whether RBI's liquidity/regulatory measures for NBFCs operate via balance‑sheet money supply tools (similar to sterilization) or via prudential rules that do not directly offset foreign exchange flows.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.17 Indian Financial System > p. 81
Strength: 4/5
“Non-Scheduled banks need to maintain reserve requirements (as per the Banking Regulation Act 1949) but may not be with RBI. Scheduled Banks are required to maintain reserve requirements with RBI as per the RBI Act 1934.”
Why relevant
States that Scheduled Banks must maintain reserve requirements with RBI, highlighting RBI's role in administering reserve requirements.
How to extend
A student could combine this with the definition of sterilization (actions that alter reserves to neutralize external flows) to test whether NBFC regulation changes reserves in a way comparable to sterilization.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Commercial Banks > p. 67
Strength: 3/5
“Financial Institutions, NBFCs, Primary Dealers and Credit Information Companies (CIC) The four All India Financial Institutions – NABARD, NHB, EXIM Bank and SIDBI are under full-fledged regulation and supervision of the RBI. NBFCs, Primary Dealers and CICs are also under the regulation and supervision of RBI. RBI regulates Banks and NBFCs both but till July 2019 RBI had the powers to supersede the Board of Banks only (in case of any mismanagement/default) and not NBFCs. In July 2019, RBI Act 1934 was amended to allow RBI to supersede the Board of NBFCs also (and appoint administrator) in public interest.”
Why relevant
Describes the scope and legal powers of RBI over NBFCs (including post‑2019 amendment), showing RBI's authority to take administrative/remedial actions vis‑à‑vis NBFCs.
How to extend
Using this, one could examine whether those statutory/regulatory powers typically involve market operations (sterilization) or administrative measures (supervision), informing whether regulation equates to sterilization.
Pattern takeaway:
UPSC Economy questions often demand 'Operational Clarity'. It is not enough to know RBI manages forex; you must know the *exact mechanism* (buying dollars releases rupees; selling bonds absorbs those rupees). They test the 'How', not just the 'What'.
How you should have studied
- [THE VERDICT]: Sitter. Directly solvable from NCERT Macroeconomics (Chapter 6: Open Economy Macroeconomics) or Vivek Singh (Chapter: Money & Banking).
- [THE CONCEPTUAL TRIGGER]: The 'External Sector' theme—specifically, the impact of heavy FDI/FII inflows on domestic inflation and the Rupee's value.
- [THE HORIZONTAL EXPANSION]: Don't just stop at OMO. Memorize the specific sterilization toolkit: Market Stabilization Scheme (MSS), Cash Management Bills (CMBs), and the difference between 'Unsterilized' vs. 'Sterilized' intervention. Also, look up 'Operation Twist'.
- [THE STRATEGIC METACOGNITION]: When studying RBI tools, categorize them by function: Liquidity Management (LAF, MSF), Safety/Regulation (CAR, PCA), or External Balance (Sterilization). The exam asks you to map the *Tool* to the *Function*.
Concept hooks from this question
👉 Sterilization of capital flows
💡 The insight
Sterilization is the reduction of the domestic monetary base to offset capital inflows, and open market sales of securities are identified as a primary sterilization tool.
High-yield for monetary policy questions: explains how central banks manage capital flow effects on money supply and inflation. Connects to exchange rate management, capital account dynamics, and limits on policy tools (e.g., available stock of government securities). Useful for questions asking which instruments are used to neutralize capital inflows and their constraints.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
🔗 Anchor: "Are Open Market Operations conducted by the Reserve Bank of India considered par..."
👉 Open Market Operations — mechanism and purpose
💡 The insight
Open Market Operations are the RBI's buying/selling of government securities to inject or absorb liquidity, the core mechanism through which sterilization can be implemented.
Essential for understanding central bank toolkit and liquidity management: explains directional effects on reserves and money supply, links directly to inflation control and liquidity adjustment operations. Enables answers that compare tools (OMO vs repo vs rate policy) and their impacts.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 3. Open Market Operations > p. 167
🔗 Anchor: "Are Open Market Operations conducted by the Reserve Bank of India considered par..."
👉 Outright vs repo operations and permanence
💡 The insight
Outright OMOs are permanent changes in securities holdings while repo/reverse-repo are temporary; permanence affects how effectively an operation sterilizes flows.
Important for distinguishing temporary versus durable liquidity management and for evaluating sterilization effectiveness and constraints. Helps answer questions on policy design, trade-offs, and why central banks may prefer one instrument over another.
📚 Reading List :
- Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "Are Open Market Operations conducted by the Reserve Bank of India considered par..."
👉 Sterilization operations and instruments
💡 The insight
Sterilization is the central bank practice of offsetting capital inflows by reducing the domestic monetary base using operations like selling government securities.
High-yield for monetary policy questions: it clarifies how central banks manage domestic liquidity in open-economy contexts and links to instruments (open market operations, reverse repos). Mastery helps answer questions on balance of payments management, capital flows, and monetary control.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "Is oversight of settlement and payment systems by the Reserve Bank of India cons..."
👉 RBI's role in overseeing payment and settlement systems
💡 The insight
The Reserve Bank has a core function of overseeing and developing national payment and settlement systems as part of its central banking responsibilities.
Important for institutional and regulatory questions: distinguishes operational/regulatory functions of the central bank from its monetary policy tools. Helps answer questions on central bank mandates, financial infrastructure, and regulatory frameworks.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.14 RBI and its Functions > p. 65
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
🔗 Anchor: "Is oversight of settlement and payment systems by the Reserve Bank of India cons..."
👉 Payment and Settlement Systems Act, 2007 (PSS Act) and authorization
💡 The insight
Payment and settlement systems in India are regulated under the PSS Act, which vests authorization and regulatory authority with the RBI.
Useful for legal-institutional questions about financial regulation: explains statutory basis for RBI's supervisory powers over payment systems and connects to wider topics like fintech regulation and financial stability.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 10.Oversight of payment and settlement systems > p. 70
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Major Acts Administered by the RBI > p. 173
🔗 Anchor: "Is oversight of settlement and payment systems by the Reserve Bank of India cons..."
👉 Sterilization via open market operations
💡 The insight
Sterilization is the central bank action of offsetting capital‑flow induced increases in the domestic monetary base by selling government securities through open market operations.
High-yield for macroeconomics and public finance questions: explains how monetary policy responds to capital flows and links to exchange rate and inflation management. It connects monetary policy tools with external sector dynamics and exam questions on RBI interventions and policy transmission.
📚 Reading List :
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "Is debt and cash management for the Central and State Governments carried out by..."
The Market Stabilization Scheme (MSS). This was introduced in 2004 specifically because the RBI ran out of standard Government Securities to sell for sterilization. MSS bonds are issued *solely* to absorb liquidity, not to fund government expenditure.
Use 'Etymological Logic'. 'Sterilization' means neutralizing a threat (preventing reproduction). In this context, the threat is 'excess money' reproducing into inflation. You need a tool that physically *removes* money. Options (B) and (D) are 'Regulation/Oversight' (Rules), and (C) is 'Management' (Admin). Only (A) 'Open Market Operations' involves the physical exchange of assets for cash, effectively sucking liquidity out of the system.
Mains GS-3 (Economic Stability): Link 'Sterilization' to the 'Impossible Trinity' (Mundell-Fleming Model). A country cannot simultaneously have a fixed exchange rate, free capital movement, and an independent monetary policy. Sterilization is India's attempt to cheat this rule, but it comes with a 'quasi-fiscal cost' (interest payments on MSS bonds).