In case RBI wants to increase rate of interest then it should:a)Sell s...
Selling of Securities by RBI to Increase Interest Rates
When the Reserve Bank of India (RBI) wants to increase the rate of interest, it can do so by selling securities. This action can have an impact on the economy in several ways:
1. Decreases Money Supply
When the RBI sells securities, it takes money out of the economy. This results in a decrease in the money supply, which means that there is less money available for lending. This, in turn, leads to an increase in the interest rate.
2. Increases Demand for Securities
When the RBI sells securities, it increases the supply of securities in the market. This results in a decrease in the price of securities. As the price of securities decreases, the yield on these securities increases. This attracts investors who are looking for higher returns on their investments. This, in turn, increases the demand for securities.
3. Controls Inflation
When the RBI increases the interest rate, it also helps to control inflation. This is because higher interest rates lead to a decrease in demand for goods and services. This, in turn, leads to a decrease in prices.
4. Attracts Foreign Investors
When the RBI increases the interest rate, it makes investments in India more attractive to foreign investors. This is because higher interest rates mean higher returns on investments. This can lead to an increase in foreign investment in India.
Conclusion
In conclusion, when the RBI wants to increase the rate of interest, it can sell securities. This action can have an impact on the economy in several ways, including decreasing the money supply, increasing the demand for securities, controlling inflation, and attracting foreign investors.