With reference to the Indian economy, consider the following statements:

  1. If the inflation is too high, the 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?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Explanation:

  1. If the inflation is too high, the RBI is likely to sell government securities, not buy them, in order to reduce the money supply and control inflation.
  2. If the rupee is rapidly depreciating, the RBI is likely to sell dollars in the market to stabilize the currency.
  3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars, as lower interest rates in these regions would lead to increased foreign investments in India, causing the rupee to appreciate. To counter this, the RBI would buy dollars and inject rupees into the economy.

Therefore, the correct answer is “2 and 3 only.”

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