Question

In order to reduce credit in the country, RBI may :

• A. Buy securities in the open market
• B. Sell securities in the open market
• C. Reduce cash reserve ratio
• D. Reduce Repo Rate

Hint:

When RBI sells securities → Money supply decreases. When RBI buys securities → Money supply increases.

Answer 1

The Correct Option is B

Step 1: Understanding credit control by RBI.
The Reserve Bank of India (RBI) controls the money supply and credit availability in the economy through various monetary policy tools such as open market operations, cash reserve ratio (CRR), and repo rate.
Step 2: Role of open market operations.
Open Market Operations (OMO) involve buying and selling government securities in the financial market. When RBI sells securities, commercial banks purchase them using their reserves, which reduces the amount of money available for lending.
Step 3: Analysis of options.

• (A) Buy securities in the open market: Incorrect. This increases money supply and credit.
• (B) Sell securities in the open market: Correct. This reduces liquidity and credit in the banking system.
• (C) Reduce cash reserve ratio: Incorrect. Lower CRR allows banks to lend more money.
• (D) Reduce Repo Rate: Incorrect. Lower repo rate encourages borrowing and increases credit.

Step 4: Conclusion.
To reduce credit in the economy, RBI sells government securities in the open market. Final Answer: Sell securities in the open market.