- A. Conducting 'Open Market Operations'
- B. Oversight of settlement and payment systems
- C. Debt and cash management for the Central and State Governments
- D. Regulating the functions of Non- banking Financial Institutions
Answer: A
Explanation
Sterilization, in the context of monetary policy, refers to actions taken by a central bank to offset the impact of foreign exchange interventions on the domestic money supply. When a central bank, like the Reserve Bank of India, buys foreign currency to prevent its appreciation, it injects domestic currency into the system, which can lead to inflation. To ‘sterilize’ this effect, the central bank sells government securities through Open Market Operations (OMOs). This action withdraws the excess domestic currency from circulation, thereby neutralizing the impact on the money supply. Options B, C, and D describe other important functions of the RBI, such as regulating financial systems, managing government debt, and overseeing non-banking financial institutions, but these are distinct from the specific monetary policy tool of sterilization. OMOs are the classical and most direct form of sterilization. This question tests a fundamental concept in international finance and central banking operations, crucial for understanding how monetary authorities manage liquidity and exchange rates.