Q. In context with the inflation control, what is the meaning of sterilization for foreign inflow?
Answer: withdrawing a equivalent local currency to maintain desirable rate of exchange
Notes: Sterilization in the context of foreign inflow refers to the process of withdrawing an equivalent amount of local currency from circulation to offset the effects of foreign currency inflows. This is done to maintain a stable exchange rate and control inflation. Central banks often engage in sterilization to prevent excessive money supply growth that could lead to inflation. For example, when foreign investment increases, it can lead to an appreciation of the local currency. sterilization helps mitigate this by neutralizing the impact on the money supply.

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