Question

Q. With respect to inflation, which of the following will be increased by the Reserve Bank of India?

Select the correct answer using the codes given below:

• A. 1 and 2 only
• B. 1 and 3 only
• C. 1, 2, and 3 only
• D. 1, 2,3, 4 only

Answer 1

The correct option is D 1, 2,3, 4 only

Explanation:

• Cash Reserve Ratio and inflation: CRR is part of RBI’s monetary policy which helps eliminate liquidity risk and regulate money supply in the economy. In the case of inflation, RBI increases the CRR due to which interest rate increases, and the capacity of banks to lend also decreases. With fewer loans, less money is available in the market hence, inflation is reduced.
• Statutory liquidity Ratio and Inflation: If the SLR increases, it restricts the bank's lending capacity and helps in controlling inflation by soaking the liquidity from the market. Consequently, banks will have less money available to lend, and they will charge higher interest rates on loans to keep up with their profit margin. This reduces the money supply in the economy and inflation will be reduced.
• Repo rate and inflation: Repo rate is used by monetary authorities to control inflation. In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
• Reverse Repo rate: During high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers.