ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Use OMO
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Purchase foreign currencies
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Sell foreign currencies
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Interest rate manipulation
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Detailed explanation-1: -What Is Sterilized Intervention? Sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the monetary base.
Detailed explanation-2: -(ii) Open Market Operations (OMO) The main instrument of sterilisation used by the Reserve Bank is Open Market Operations (OMO). The Reserve Bank has conducted OMO for absorbing excess liquidity in the system through outright sale of securities.
Detailed explanation-3: -Sterilized Intervention A sterilized foreign exchange intervention occurs when the central bank buys a foreign currency and offsets the increase in the domestic currency by selling domestic government securities, which decreases the money supply by the amount of the securities.
Detailed explanation-4: -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.