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Which of the following can RBI resort to whenever it wants to reduce the liquidity in the banking system?
- a)Increase Repo Rate
- b)Increase Reverse Repo Rate
- c)Reduction in CRR
- d)Reduction in SLR
- e)All of these
Correct answer is option 'B'. Can you explain this answer?
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Which of the following can RBI resort to whenever it wants to reduce ...
Reverse Repo Rate is the rate of interest at which the RBI borrows funds from other banks in the short term. An increase in the reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool that can be used by the RBI to drain excess money out of the system.
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Which of the following can RBI resort to whenever it wants to reduce ...
Explanation:
Increasing Reverse Repo Rate:
- When RBI increases the reverse repo rate, it means that the central bank will offer higher interest rates to banks for parking their surplus funds with it. This encourages banks to park more funds with the RBI, reducing the liquidity in the banking system.
Other options:
- Increase Repo Rate: Increasing the repo rate would lead to higher borrowing costs for banks from the RBI, which can also help in reducing liquidity in the banking system.
- Reduction in CRR: A reduction in the Cash Reserve Ratio (CRR) would infuse more liquidity into the banking system, so this option does not help in reducing liquidity.
- Reduction in SLR: Similarly, a reduction in the Statutory Liquidity Ratio (SLR) would also inject more liquidity into the system, so this option also does not help in reducing liquidity.
Therefore, the correct option for the RBI to resort to whenever it wants to reduce liquidity in the banking system is to increase the Reverse Repo Rate.
Increasing Reverse Repo Rate:
- When RBI increases the reverse repo rate, it means that the central bank will offer higher interest rates to banks for parking their surplus funds with it. This encourages banks to park more funds with the RBI, reducing the liquidity in the banking system.
Other options:
- Increase Repo Rate: Increasing the repo rate would lead to higher borrowing costs for banks from the RBI, which can also help in reducing liquidity in the banking system.
- Reduction in CRR: A reduction in the Cash Reserve Ratio (CRR) would infuse more liquidity into the banking system, so this option does not help in reducing liquidity.
- Reduction in SLR: Similarly, a reduction in the Statutory Liquidity Ratio (SLR) would also inject more liquidity into the system, so this option also does not help in reducing liquidity.
Therefore, the correct option for the RBI to resort to whenever it wants to reduce liquidity in the banking system is to increase the Reverse Repo Rate.
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Which of the following can RBI resort to whenever it wants to reduce the liquidity in the banking system?a)Increase Repo Rateb)Increase Reverse Repo Ratec)Reduction in CRRd)Reduction in SLRe)All of theseCorrect answer is option 'B'. Can you explain this answer?
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