If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct?

Answer: B. Statements 2 and 3 are correct; statement 1 (truncated context) treated wrong per official answer. The OCR truncated parts. The interpretable statements: Statement on RBI buying dollars when foreign rates fall: This relates to capital flow dynamics. When US/EU interest rates FALL, capital flows TO India seeking higher yields, increasing dollar inflow. RBI typically BUYS DOLLARS to prevent excessive rupee appreciation. So this is CORRECT. Statement on foreign capital inflow effects: When foreign capital flows in, the rupee tends to appreciate; RBI absorbs dollars (buys them) to moderate the appreciation. RBI then sterilises the rupee injection via OMOs. CORRECT. Distractor (the wrong statement) is likely about FII flows or capital account convertibility incorrectly stated. Source: RBI Monetary Policy reports / standard international economics.