Which measure(s) is the Reserve Bank most likely to take to combat inflation in the economy?
A) Increase repo rate
B) Increase money supply
C) Decrease cash reserve ratio
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. Only A
- To combat inflation, the Reserve Bank of India (RBI) would primarily A) Increase repo rate. This action makes borrowing costlier for banks, leading to higher lending rates, thus reducing spending and curbing inflation. Options B and C would exacerbate inflation. Increasing the money supply (B) or decreasing the cash reserve ratio (C) would inject more liquidity into the economy, fueling demand and pushing prices higher. Therefore, only increasing the repo rate is an effective anti-inflationary measure.