Statement 2: When the Indian Rupee experiences rapid depreciation, the Reserve Bank of India (RBI) intervenes in the foreign exchange market by selling US dollars from its foreign exchange reserves. This action increases the supply of dollars and reduces the supply of rupees in the market, thereby strengthening the rupee and mitigating its depreciation.
Statement 3: A fall in interest rates in major economies like the USA or European Union makes investments in those regions less attractive. This can lead to capital inflows into emerging markets such as India, as investors seek higher returns. To manage the potential appreciation of the Indian Rupee due to these inflows and maintain exchange rate stability, the RBI may intervene by buying US dollars from the market, thereby increasing its foreign exchange reserves.
Statement 1: If inflation is excessively high, the Reserve Bank of India (RBI) implements contractionary monetary policy measures. One such measure is Open Market Operations (OMO), where the RBI sells government securities. Selling government securities withdraws liquidity (rupees) from the banking system, reducing the money supply and thereby helping to curb inflation. Buying government securities, conversely, injects liquidity into the system, which would exacerbate inflationary pressures. Therefore, statement 1 is incorrect.
Options (a), (c), and (d) are incorrect because they include statement 1, which is factually inaccurate.