Which among the following factors affect the liquidity in the economy?

1. Borrowings of the government

2. Buying rupee and selling a foreign currency such as the US dollar by Reserve Bank of India

3. Conducting Open Market Operation

Select the correct option from the codes given below:

Answer: [D] 1, 2 & 3

Liquidity is influenced by demand and supply of money in the system. The central bank, the Reserve Bank of India , can increase or decrease the liquidity in the financial markets. There are three ways the liquidity gets affected. First, the borrowings of the government — the biggest borrower in India — to fund the deficit that arises when its income falls short of expenses.  Second will be the increased borrowings by the corporate sector to fund capital expenditures and short-term credit needs. A third reason could be a reduction of availability of the rupee by the central bank by buying rupee and selling a foreign currency such as the US dollar. This is primarily done to maintain the value of rupee. The central bank prefers to withdraw excess liquidity from the financial market when asset prices near a bubble situation.

This question is a part of GKToday's Integrated IAS General Studies Module