Mechanism by which rbi can withdraw excess money supply from the forex market?
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Reserve Bank of India is the sole body who is authorized to issue currency in India. While Coins and 1 rupee notes are minted by Government of India, the RBI works as an agent of GOI for distributing and handling coins. RBI also works to prevent counterfalling of currency by regularly upgrading security features of currency. For putting currency, RBI has four facilities at Dewas, Nasik, Mysore and Salboni. The RBI is authorized to issue notes upto value of rupees 10000 and coins upto 1 thousand.
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Since the options are not given, I am giving an assumed answer.
The correct answer could be - Open market operation.
An Open market operation is a process of buying or selling of the government securities in an open market so that the supply of money in the banking system can be controlled.
When there is an excess supply of money in the forex market, the central bank or the RBI will sell the government securities. Therefore, all the excess liquidity and money supply will be sucked out. Similarly, when the money supply or the liquidity is tight, the RBI will buy government securities and so, the money supply will be injected back into the economy.
The correct answer could be - Open market operation.
An Open market operation is a process of buying or selling of the government securities in an open market so that the supply of money in the banking system can be controlled.
When there is an excess supply of money in the forex market, the central bank or the RBI will sell the government securities. Therefore, all the excess liquidity and money supply will be sucked out. Similarly, when the money supply or the liquidity is tight, the RBI will buy government securities and so, the money supply will be injected back into the economy.
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