IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system
Suppose the Reserve Bank of India wishes to reduce the growth of bank credit and thereby inflationary pressure. Which action is most consistent with that aim?
Raising the repo rate is consistent with restricting credit growth. It increases the cost of funds for banks, which pass this on through higher lending rates, reducing borrowing and spending and so easing inflationary pressure.
- ALowering the cash reserve ratio
- BRaising the repo rateCorrect
- CBuying government securities from banks in the open market
- DLowering the statutory liquidity ratio
- Reducing the marginal standing facility rate
Explanation
A higher repo rate raises banks' cost of borrowing from the central bank, which raises lending rates and reduces loan demand. The other options all loosen liquidity or lower costs, increasing the capacity to lend.
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