Question

Why does the Reserve Bank of India increase the rate of interest on loans?

• A. To increase money supply
• B. To decrease money supply
• C. To increase inflation
• D. To decrease inflation

Answer 1

Answer: (B), (D)

To decrease inflation

The Reserve Bank of India (RBI) tends to increase the rate of interest on loans to discourage people from availing loans. This is because an increase in the money supply in the economy tends to increase the prices of goods and services and causes inflation. The RBI tackles this situation by increasing the rate of interest on loans and discouraging people from availing loans as they would have to pay higher interest amounts for their loans. This measure by the RBI would discourage people from spending more on goods and services, subsequently controlling the inflation in the economy.