SAVINGS, THE BALANCE OF PAYMENTS, AND THE MONEY SUPPLY
43
investment—portfolio or FDI—the central bank can offset this expansion
in the money supply (brought about by a rise in FE) by reducing its lend-
ing to the government (
G
b/CB
). This procedure is known as
STERILIZATION
.
Over the last few years, net Reserve Bank of India (RBI) credit to the cen-
tral government has been declining sharply as the central bank has steril-
ized the accumulated foreign-exchange reserves from capital inflows. In
the late 1980s, for instance, central bank lending to the government was
90 per cent of the reserve money and by the end of March 2004, ...
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