CA Foundation · Business Economics · Money Market
Suppose the RBI wants to curb inflation caused by excess demand in the economy. Which combination of quantitative policy actions would be most consistent with this objective?
Raising the repo rate and raising the CRR is correct. Both are contractionary: a higher repo rate makes bank borrowing costlier, and a higher CRR reduces lendable resources with banks. Together they reduce credit and money supply, curbing demand-driven inflation, whereas the other combinations include an expansionary action.
- ARaise the repo rate and raise the Cash Reserve RatioCorrect
- BLower the repo rate and raise the Cash Reserve Ratio
- CRaise the repo rate and buy government securities through open market operations
- DLower the Cash Reserve Ratio and sell government securities through open market operations
Explanation
To fight demand-led inflation the RBI tightens liquidity and makes credit costlier. A higher repo rate raises borrowing costs and a higher CRR reduces the funds banks can lend. Buying securities in OMO injects money, and lowering CRR frees funds, both expansionary, so the other options are inconsistent.
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