Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’?
Answer & explanation
Answer: (a) Conducting ‘Open Market Operations’
Sterilisation means offsetting the effect of the RBI's foreign-exchange dealings on domestic money supply. When the RBI buys dollars it releases rupees; it then sells government securities through open market operations to mop those rupees back up.
- ✓ (a) The RBI's own Working Group on Instruments of Sterilisation calls open market operations, in which the RBI sells securities, the commonly used instrument of sterilisation; the sale mops up the rupees released by forex purchases.
- ✗ (c) Debt and cash management is the RBI's role as banker and debt manager to governments; it does not by itself neutralise the liquidity impact of capital flows.
- ✗ (b) Overseeing payment and settlement systems is a regulatory function about safe transfers of money, not about controlling the money supply.
Remember · Sterilisation = RBI neutralising liquidity from forex intervention, mainly via OMOs (and the Market Stabilisation Scheme). OMO sale absorbs liquidity; OMO purchase injects it.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- Reserve Bank of India, Report of the Working Group on Instruments of Sterilisation (Dec 2003) ↗ “While open market operations (OMO) involving sale of securities constitute the commonly used instrument of sterilisation, there are several other instruments available to offset the impact of capital inflows on domestic money supply.”
- Reserve Bank of India, FAQs on Government Securities Market ↗ “When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios.”
Question and answer: UPSC's official GS Paper I (2023, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 1 Oct 2026 (how we verify). ·