BANKING AFFAIRS

Detailed explanation-1: -Intervention by the RBI in the foreign exchange market by way of purchase of dollars that increases forex reserves and reserve money, if not sterilised, can push down money market interest rates below the policy rate and lead to inflation.

Detailed explanation-2: -RBI holds its own reserve of foreign exchange. When the foreign exchange rate becomes very high, the RBI can sell currency from its reserve in the market. This will lead to an increase in the supply of foreign currency in the market. The exchange, as a result, will decline.

Detailed explanation-3: -The Reserve Bank issues licences to banks and other institutions to act as Authorised Dealers in the foreign exchange market. In keeping with the move towards liberalisation, the Reserve Bank has undertaken substantial elimination of licensing, quantitative restrictions and other regulatory and discretionary controls.

Detailed explanation-4: -RBI has an important role to play in regulating & managing Foreign Exchange of the country. It manages forex and gold reserves of the nation. On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange arising from trade and capital transactions.