Which of the following is used by RBI for sterilization of the Capital Inflows?
[A]Base Rate System
[C]Open Market Operations
[D]Credit Authorization Scheme
Open Market Operations
To check the reverse Capital Inflows, central banks often attempt what is known as the “sterilization” of capital flows. In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow. Theoretically, this can be done by encouraging private investment overseas, or allowing foreigners to borrow from the local market. The classical form of sterilization, however, has been through the use of open market operations, that is, selling Treasury bills and other instruments to reduce the domestic component of the monetary base.