CA Foundation · Business Economics · Money Market
During a period of high inflation driven by excess demand, which combination of RBI actions would be consistent with a tight monetary policy stance?
Raising the repo rate and selling government securities through OMO is consistent with tight policy. Both actions make credit costlier and absorb liquidity, reducing spending and easing demand-driven inflation. Cutting rates, buying securities or lowering reserve ratios would add liquidity and worsen inflation.
- ARaise the repo rate and sell government securities through OMOCorrect
- BCut the repo rate and buy government securities through OMO
- CLower the CRR and lower the SLR
- DRaise the reverse repo rate and cut the CRR
Explanation
To curb demand-pull inflation the RBI must reduce liquidity and make credit costlier. A higher repo rate raises borrowing costs, and OMO sales absorb money from the system. Options B and C expand liquidity, and option D mixes a tightening step with an easing one (cutting CRR).
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