Question

If inflation is to be controlled, the RBI

• A. raises SLR and lowers CRR
• B. lowers SLR and raises CRR
• C. raises both CRR as well as SLR
• D. none of these

Hint:

To control inflation, the RBI typically raises CRR and SLR to restrict the money supply, making borrowing more expensive and reducing inflationary pressures.

Answer 1

The Correct Option is C

Step 1: Understanding the Role of SLR and CRR:
SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) are tools used by the Reserve Bank of India (RBI) to control inflation and manage the money supply in the economy.
- SLR is the percentage of a commercial bank's net demand and time liabilities that it needs to keep in the form of liquid assets like cash, gold, or government-approved securities.
- CRR is the percentage of a commercial bank's total deposits that it needs to keep with the RBI in the form of reserves.
Step 2: Controlling Inflation:
- To control inflation, the RBI needs to reduce the money supply in the economy. This can be done by increasing both SLR and CRR.
- By raising SLR, banks are required to hold a larger proportion of their assets in the form of liquid reserves, reducing the amount available for lending.
- By raising CRR, the RBI ensures that banks have less money available to lend to consumers and businesses.
Step 3: Conclusion:
Therefore, the correct answer is option (C), as raising both CRR and SLR helps the RBI control inflation.