Question

Which of the following are the direct instruments exercised by the Reserve Bank of India to control the money supply?
(i) Cash Reserve Ratio 
(ii) Open Market Operations 
(iii) Foreign Exchange Rate 
(iv) Statutory Liquidity Ratio

• A. (i, ii, iii)
• B. (i, ii, iv)
• C. (ii, iii, iv)
• D. (i, iii, iv)

Answer 1

The Correct Option is B

To determine which instruments the Reserve Bank of India (RBI) uses directly to control the money supply, let's understand each given option:

1. Cash Reserve Ratio (CRR): This is the percentage of a bank's total deposits that must be maintained in the form of liquid cash, as a reserve, with the RBI. Manipulating the CRR is a direct method used by the RBI to control liquidity and money supply in the economy.
2. Open Market Operations (OMO): These are activities conducted by the RBI involving the buying and selling of government securities in the open market. This method affects the level of cash reserves in the banking system, impacting the money supply. This is also a direct instrument.
3. Foreign Exchange Rate: While the foreign exchange rate is influenced by RBI through interventions, it is not a direct monetary policy tool used to control the money supply. Its primary objective is to stabilize the currency rather than manage money supply directly.
4. Statutory Liquidity Ratio (SLR): This is the minimum percentage of a bank's net demand and time liabilities that must be held in the form of cash, gold, or government-approved securities before giving credit to the customers. Like CRR, SLR is a direct tool used by RBI to regulate the money supply.

From this analysis, the instruments that the RBI directly uses to control the money supply are:

• Cash Reserve Ratio (CRR)
• Open Market Operations (OMO)
• Statutory Liquidity Ratio (SLR)

Hence, the correct option is (i, ii, iv).

Let's quickly summarize why each alternative is correct or incorrect:

• Option (i, ii, iii) is incorrect because the Foreign Exchange Rate is not a direct tool.
• Option (ii, iii, iv) is incorrect for the same reason as above.
• Option (i, iii, iv) excludes Open Market Operations, which is a direct instrument.
• Therefore, Option (i, ii, iv) correctly lists CRR, OMO, and SLR as direct tools used by RBI to manage the money supply.