Question

Write three policy tools to control money supply.

Hint:

The RBI uses tools like CRR, OMO, and repo rates to control the money supply, aiming to maintain economic stability and control inflation.

Answer 1

Step 1: Open Market Operations (OMO).
The central bank buys or sells government securities in the open market to regulate the money supply. Buying securities increases the money supply, while selling them reduces it.

Step 2: Cash Reserve Ratio (CRR).
CRR is the percentage of a bank's total deposits that it must keep as reserves with the central bank. By increasing the CRR, the RBI reduces the amount of money available for lending, thereby reducing the money supply.

Step 3: Repo Rate.
The repo rate is the rate at which commercial banks borrow money from the central bank. By increasing the repo rate, the RBI can reduce the money supply by making borrowing more expensive for banks.