NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
Which combination of policy actions by the Reserve Bank of India would be most consistent with a contractionary monetary stance aimed at curbing inflation?
Raising both the repo rate and the cash reserve ratio is contractionary. A higher repo rate makes credit costlier and a higher CRR reduces bank lendable funds, together reducing money supply and demand to curb inflation. Open market purchases would instead add liquidity.
- ALowering the repo rate and lowering the CRR
- BRaising the repo rate and raising the CRRCorrect
- CRaising the repo rate and conducting open market purchases of government securities
- DLowering the CRR and conducting open market purchases of government securities
Explanation
Raising the repo rate makes borrowing costlier, and raising CRR cuts the funds banks can lend, both reducing liquidity. Open market purchases inject liquidity, so they are expansionary and make the other combinations inconsistent or expansionary.
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