With reference to the Indian economy, consider the following statements:1. If the inflation is too high, the 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?
✓ Correct answer: b) 2 and 3 only
ExplanationStatement 1 is incorrect : When inflation is higher than the RBI aims to reduce liquidity in the market.Buying government securities injects money into the economy by increasing liquidity, which would worsen inflation.On the contrary the RBI is more likely to sell government securities to absorb excess liquidity.Statement 2 is correct : When the rupee depreciates rapid- ly its value falls relative to the U.S. dollar.This means more rupees are required to purchase one dollar, indicating a weak- ening rupee.To stabilize the rupee and prevent excessive depreciation, the Reserve Bank of India (RBI) can intervene in the foreign exchange market by selling dollars from its reserves.When the RBI sells dollars in the market, it increases the available supply of dollars in the foreign exchange market.Market participants (importers, banks, and investors) exchange rupees to buy these newly available dollars.This increases the demand for rupees.As demand for rupees rises, the pressure on the rupee to depreciate reduces.This can help stabilize or even strengthen the rupee.Statement 3 is
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