Question

The central bank can increase availability of credit by _____________.

• A. raising repo rate
• B. raising reverse repo rate
• C. buying government securities
• D. selling government securities

Answer 1

Answer: (C)

buying government securities

If RBI wishes to increase the supply of credit it undertakes an open market purchase of government securities. This increases the monetary base of the banks and they have more funds to lend as credit.

Raising repo rates means banks will borrow at higher rates from RBI, and in turn lend to the public at higher rates. This leads to decrease in borrowing.

When reverse repo rate increases, banks would like to park their funds with RBI at higher rates and there will be lesser amount available to give as credit.