Which monetary policy tool is used by the RBI to control inflation?

The correct answer is - Increase in Cash Reserve Ratio (CRR)

Key Points

• Increase in Cash Reserve Ratio (CRR)
  • The Cash Reserve Ratio (CRR) is a specific percentage of a bank's total deposits that must be maintained as reserves in the form of liquid cash with the Reserve Bank of India (RBI).
  • By increasing the CRR, the RBI can reduce the amount of funds available for banks to lend, thus reducing the money supply in the economy.
  • This reduction in money supply helps in controlling inflation by limiting the amount of money available for consumption and investment.

Additional Information

• Reducing repo rate
  • The repo rate is the rate at which the RBI lends money to commercial banks.
  • Reducing the repo rate usually aims to encourage borrowing and investment, which can increase the money supply and potentially lead to higher inflation, not control it.
• Printing more currency
  • Printing more currency increases the money supply directly, which can lead to higher inflation if not managed properly.
  • This action is generally not used to control inflation; rather, it can exacerbate it.
• Lowering taxation
  • Lowering taxes increases disposable income for consumers and businesses, potentially increasing spending and investment.
  • This can lead to a higher money supply and potentially higher inflation, contrary to the goal of controlling inflation.