CSEET · Economic and Business Environment · Key Government Institutions
If the RBI wants to reduce excess liquidity and curb inflation in the economy, which action is most consistent with that objective?
Increasing the policy repo rate is the action consistent with curbing inflation, because it makes bank borrowing costlier, tightens credit and reduces liquidity. Cutting CRR or SLR, or buying securities in the open market, would inject money into the system and worsen inflation.
- AReducing the cash reserve ratio
- BBuying government securities in the open market
- CIncreasing the policy repo rateCorrect
- DReducing the statutory liquidity ratio
Explanation
Raising the repo rate makes borrowing from the RBI costlier, which tightens credit and reduces money supply and demand pressures. Lowering CRR or SLR and buying securities all release funds into the banking system, which would expand liquidity and be inflationary.
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