Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'? 

The Correct answer is  Option 1.

Key PointsRBI Sterilization:

• Open Market Operations (OMOs):
  • The RBI conducts sterilization by engaging in Open Market Operations, which involve the buying or selling of government securities to manage the domestic money supply.
  • This is done to offset the impact of foreign exchange interventions.
• Purpose of Sterilization:
  • Sterilization refers to actions taken by the RBI to neutralize the impact of foreign exchange interventions on the domestic money supply.
• Foreign Exchange Intervention:
  • When the RBI intervenes in the foreign exchange market, it can influence the money supply by either buying or selling currencies.
• Neutralizing Impact:
  • To maintain monetary stability, the RBI conducts sterilization operations by selling government securities to absorb excess liquidity (when the money supply increases due to forex intervention) or by purchasing securities to inject liquidity (when the money supply decreases).
• Maintaining Balance:
  • These operations help the RBI control the money supply, ensuring that foreign exchange interventions do not cause unwanted monetary fluctuations in the economy.