Which one of the following activities of the Reserve Bank of India is considered to be part of steri

Question

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

Accepted Answer

To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the sterilization of capital flows. In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily.In theory, this can be achieved in several ways, such as by:Encouraging private investment overseasAllowing foreigners to borrow from the local marketThe classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other instruments to reduce the domestic component of the monetary base.