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RAS question

In a USD/INR Buy-Sell Swap conducted by the RBI, which of the following happens at the initiation of the swap?

Correct answer: (B) RBI buys dollars from banks and provides rupees.

At the initiation of an RBI USD/INR Buy-Sell Swap, the RBI buys US dollars from banks and provides rupees, thereby injecting rupee liquidity in the first leg.

  1. (A)

    RBI sells dollars to banks and receives rupees

  2. (B)

    RBI buys dollars from banks and provides rupees

  3. (C)

    RBI raises SLR to absorb liquidity

  4. (D)

    RBI sells government bonds to reduce money supply

Explanation

A USD/INR Buy-Sell Swap is named from the RBI's side of the transaction. In the first leg, the RBI buys US dollars from banks and pays rupees in return, so rupee liquidity enters the banking system. The cited RBI press release for a USD/INR Buy/Sell Swap auction separately reports the “Rupee Liquidity injected in the first leg,” which confirms the direction of the initiation transaction. At maturity, the swap reverses: the RBI sells the dollars back to banks and receives rupees. Therefore, the operative first-leg action is not a rupee-absorbing sale of dollars, but a dollar purchase by the RBI against rupee payment.

Why the other options are wrong

  • (A) This describes the maturity-side reversal, where the RBI sells dollars back and receives rupees, not the initiation of a Buy-Sell Swap.
  • (C) Raising SLR is a statutory liquidity-ratio measure and is unrelated to the first leg of a USD/INR Buy-Sell Swap.
  • (D) Selling government bonds is an open-market operation to absorb rupee liquidity, whereas this swap’s first leg injects rupee liquidity.

Concept

This tests monetary policy instruments and liquidity management through foreign-exchange swaps. It recurs in RAS because candidates must distinguish RBI liquidity injection and absorption tools by transaction direction, not just by their labels.

Source

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