Commercial Applications
A country is facing economic instability, and the central bank decides to implement strict credit control measures. Which combination of actions is the central bank most likely to take to stabilize the economy?
- Increase the bank rate and sell government securities.
- Decrease the Cash Reserve Ratio (CRR) and lower the bank rate.
- Increase the Statutory Liquidity Ratio (SLR) and buy government securities.
- Lower the reserve requirement and reduce the statutory liquidity ratio.
Banking
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Answer
Increase the bank rate and sell government securities.
Reason — When the central bank wants to reduce the volume of credit in the economy (to control inflation/instability), it raises the bank rate (making borrowing expensive for commercial banks) and sells government securities in the open market (which props up the cash reserves of commercial banks with the central bank). Both actions contract credit. The other options would expand credit, which is the opposite of what is needed during instability. Option 3 is contradictory — increasing SLR contracts credit, but buying securities expands it.
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