Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’?
Explanation
Sterilization refers to the process by which the Reserve Bank of India (RBI) neutralizes the impact of foreign exchange inflows or outflows on the domestic money supply. When there is a surge in foreign capital inflows, the RBI often buys foreign currency (like US Dollars) to prevent the Indian Rupee from appreciating excessively. This purchase injects an equivalent amount of Indian Rupees into the banking system, increasing liquidity and potentially causing inflation. To 'sterilize' or offset this effect, the RBI conducts Open Market Operations (OMO) by selling government securities in the open market to absorb the excess liquidity. Conversely, during capital outflows, the RBI sells foreign currency and buys government securities to maintain liquidity. Thus, Open Market Operations are the primary instrument used for sterilization to maintain monetary stability.