The RBI sells foreign exchange from its reserves to meet a deficit in India’s balance of payments. Which of the following correctly describes this?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → It uses the RBI’s role as custodian of the foreign exchange reserves, and India’s official reserves fall.
The RBI holds India’s foreign exchange reserves; it is their custodian. When it sells foreign exchange to meet a deficit, the reserves go down.
This sale is an official reserve sale, and the fall in reserves measures the BoP deficit. Banker to the government and lender of last resort are other roles of the RBI.
This question uses Money and Banking and Open Economy Macroeconomics together.
NCERT (2026-27): “6.1.3 Balance of Payments Surplus and Deficit … The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). …” Money and Banking (Introductory Macroeconomics): “Central bank has several important functions. It issues the currency of the country. It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios. It acts as a banker to the government. It is the custodian of the foreign exchange reserves of the economy. …” |