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 ma

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Q: 3 (IAS/2022)
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 ?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,552,198,57,552,78,63

keywords: 

{'indian economy': [0, 3, 3, 5], 'rbi': [1, 4, 2, 23], 'interest rates': [0, 1, 0, 3], 'reserve bank': [1, 0, 3, 4], 'rupee': [1, 0, 1, 0], 'inflation': [0, 1, 0, 3], 'market': [0, 0, 1, 0], 'government securities': [0, 1, 0, 5], 'india': [8, 1, 7, 13]}

Statements 2 and 3 are correct, while statement 1 is incorrect.

  1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities: This statement is incorrect. If inflation is high, RBI may sell government securities to reduce the money supply in the economy and control inflation.

  2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market: This statement is correct. If the value of the rupee is falling rapidly against other major currencies, RBI may intervene in the foreign exchange market by selling dollars to increase the supply of rupees and reduce its depreciation.

  3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars: This statement is correct. If interest rates in the US or EU fall, investors may move their funds to other countries with higher interest rates, leading to a depreciation of the rupee. In such a situation, RBI may buy dollars to increase the supply of dollars in the market and prevent further depreciation of the rupee.

Therefore, the correct answer is: Statements 2 and 3 are correct, while statement 1 is incorrect.


Preparing for Future Exams: Learning from the Analysis of Past Questions

Topics related to this question can include:

  1. Reserve Bank of India (RBI) and its functions
  2. Monetary Policy of India
  3. Inflation and its causes
  4. Exchange rate and its determinants
  5. Balance of Payment and Foreign Exchange Reserves
  6. Fiscal Policy of India
  7. Macroeconomic indicators

Sources for studying these topics can include:

  1. NCERT textbooks: Macroeconomics, Indian Economic Development
  2. Economic Survey of India
  3. RBI website and publications
  4. Indian Economy by Ramesh Singh
  5. Macroeconomics by Dornbusch and Fischer
  6. International Economics by Salvatore

Chapters from NCERT textbooks that can be referred to are:

  1. Indian Economic Development:
  • Chapter 2: Indian Economy 1950-1990
  • Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal
  • Chapter 4: Poverty
  • Chapter 5: Human Capital Formation in India
  • Chapter 6: Rural Development
  • Chapter 7: Employment: Growth, Informalisation and Other Issues
  1. Macroeconomics:
  • Chapter 2: National Income Accounting
  • Chapter 3: Money and Banking
  • Chapter 4: Determination of Income and Employment
  • Chapter 5: Government Budget and the Economy
  • Chapter 6: Open Economy Macroeconomics

Related concepts that should be studied include:

  1. Repo Rate, Reverse Repo Rate, CRR, SLR and their effects on the economy
  2. Fiscal Deficit, Revenue Deficit, Primary Deficit, and their impact on the economy
  3. Exchange rate regimes and their characteristics
  4. Balance of Payment and its components
  5. Factors affecting the exchange rate
  6. Capital Account Convertibility and its implications
  7. Macroeconomic indicators such as GDP, Inflation, Unemployment, and their measurement and interpretation.