NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
Which of the following RBI actions would be expected to be most contractionary for liquidity in the banking system?
Conducting reverse repo or variable rate reverse repo auctions is the contractionary action because the RBI absorbs surplus funds from banks. Cutting the CRR, buying government securities in open market operations and lowering the repo rate all add liquidity or ease credit, so they are expansionary.
- AReducing the cash reserve ratio
- BConducting reverse repo or variable rate reverse repo auctions to absorb liquidityCorrect
- CBuying government securities through open market operations
- DLowering the repo rate
Explanation
Reverse repo or variable rate reverse repo auctions take surplus funds out of banks, reducing system liquidity. Cutting CRR and buying government securities through OMO inject liquidity, and a lower repo rate makes borrowing cheaper, so these are easing actions.
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