Question

Discuss the likely consequence on money supply if the rate-setting panel had decreased the said rate.

Hint:

Monetary policy decisions impact money supply, inflation, and economic growth. A lower interest rate boosts liquidity, while a higher rate helps control inflation.

Answer 1

Understanding the Impact of Lowering Interest Rates:
If the RBI had decreased the benchmark lending rate, it would have led to an increase in money supply.
Likely Consequences:
- A lower interest rate would reduce borrowing costs for businesses and consumers, encouraging more loans.
- Increased borrowing would result in higher spending and investment, boosting overall demand in the economy.
- Excess liquidity in the market might also lead to inflationary pressures, as too much money chasing too few goods can drive up prices.
- The expansion in money supply could support economic growth but might also require future monetary tightening to prevent overheating.
Conclusion:
A decrease in interest rates would increase money supply, stimulating economic activity but with a risk of inflation.