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What do you understand by sterilization? How does RBI stabilize the money supply against external shocks?
Sterilization refers to a central banks actions to counter balance the effects of foreign exchange interventions on the domestic money supply. Sterilization in India In India sterilization emerged post-1991 economic liberalization to manage important exchange impact on the domestic money supply. TheRead more
Sterilization refers to a central banks actions to counter balance the effects of foreign exchange interventions on the domestic money supply.
Sterilization in India
In India sterilization emerged post-1991 economic liberalization to manage important exchange impact on the domestic money supply. The reserve Bank of India use tools like market stabilization scheme bonds and open market operations to absorb excessive liquidity, ensuring monetary stability amid increased forest increased forex market activity and growing foreign exchange reserve.
Measures used by RBI to guard against external shocks
1. Open Market Operations (OMO): Buying or selling government securities to regulate liquidity and stabilize the currency.
2. Liquidity Ratio : Requiring commercial banks to maintain a certain percentage of their deposits in liquid assets, ensuring they have sufficient funds to meet withdrawal demands.
3. Monetary Policy Tools: Adjusting interest rates, cash reserve ratios, and statutory liquidity ratios to influence credit growth, inflation, and exchange rates.
4. Foreign Exchange Intervention: Buying or selling foreign currencies to stabilize the exchange rate and manage foreign exchange reserves.
5. Capital Controls: Regulating inflows and outflows of capital to prevent sudden surges or withdrawals.
These tools help the RBI maintain financial stability, manage exchange rates, and mitigate the impact of external shocks on the Indian economy.
Way forward
RBI can enhance its ability to manage external shocks by: monitoring global trends, making timely interventions, adopting a flexible exchange rate regime, maintaining adequate reserves, communicating clearly, collaborating with stakeholders, and regularly reviewing and refining its policy framework to promote financial stability and sustainable growth.
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