Question

To reduce the liquidity in the market, RBI can perform which of the following operations?

i. Increase policy rate
ii. Increase cash reserve requirements
iii. Increase the statutory liquidity ratio

• A. (i) and/or (ii) and/or (iii)
• B. Only (i) and/or (iii)
• C. Only (i) and/or (ii)
• D. Only (i)

Answer 1

The correct option is A

(i) and/or (ii) and/or (iii)

Increase in the repo or policy rate means an increase in the market interest rate for the banks. The banks will hike up their loan interest rates too as it is costlier for them to lend. This will discourage borrowers from taking loans from banks and domestic spending will fall in the economy, thus causing a further reduction in the liquidity. Increase in CRR or SLR forces banks to keep more reserves thus diminishing the money supply and liquidity in the economy.