Q35
Indian EconomyMoney, Banking & Financial Institutions
Which of the following would have inflationary effect on the economy? 1. RBI releasing new bonds in the market 2. RBI decreasing the SLR 3. RBI increasing the Bank Rate 4. Abolition of CRR
- a.1, 2 and 3
- b.1 and 4 only
- c.2 and 4 only
- d.3 and 4 only
Answer: (C) 2 and 4 only
A measure is inflationary if it increases liquidity and the money supply. Lowering the SLR and abolishing the CRR both release funds that banks can lend, so statements 2 and 4 are inflationary. When the RBI sells new bonds (an open-market sale) it absorbs money from the system, and raising the Bank Rate makes borrowing costlier; both are contractionary, so statements 1 and 3 are wrong. Remember: CRR is the share of deposits kept as cash with the RBI (no interest earned), while SLR is the share kept by the bank itself in liquid assets such as gold and government securities. Other quantitative tools are the repo and reverse repo rates, MSF and OMO.