Consider the following statements regarding sterilization by RBI 1 It is an action taken by RBI to c...........

Indian Economic System(PCS) Money and banking

Consider the following statements regarding sterilization by RBI: .

1. It is an action taken by RBI to counter the effects on the money supply triggered by a balance of payments surplus or deficit.

2. A sterilized intervention involves sale or purchase of foreign currency to influence the exchange value of the domestic currency, without changing the monetary base.

Which of the above statements is/are incorrect ?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

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Explanation:

Correct Option: (d) Explanation: Both statements are correct Supplementary notes: Sterilization It is a form of monetary action in which a central bank seeks to limit the effect of in fl ows and out fl ows of capital on the money supply. Sterilization most frequently involves the purchase or sale of fi nancial assets by a central bank and is designed to offset the effect of foreign exchange intervention. The sterilization process is used to manipulate the value of one domestic currency relative to another and is initiated in the foreign exchange market. Sterilized intervention is the purchase or sale of foreign currency by a central bank to in fl uence the exchange value of the domestic currency, without changing the monetary base. Sterilized interventions involve the sale or purchase of foreign currency assets and an open market operation involving the purchase or sale of government securities (in the same size as the fi rst transaction). 14. Co