What is the primary tool used by the RBI to control inflation?

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Question: What is the primary tool used by the RBI to control inflation?

Options:

Correct Answer: Modifying the repo rate

Solution:

The primary tool used by the RBI to control inflation is modifying the repo rate.

What is the primary tool used by the RBI to control inflation?

What is the primary tool used by the RBI to control inflation?

Step 1: Understand what inflation is. Inflation means that prices of goods and services are rising.
Step 2: Know that the Reserve Bank of India (RBI) is responsible for managing the economy, including controlling inflation.
Step 3: Learn about the repo rate. The repo rate is the interest rate at which the RBI lends money to commercial banks.
Step 4: Realize that when the RBI increases the repo rate, it becomes more expensive for banks to borrow money.
Step 5: Understand that when borrowing is more expensive, banks lend less money to people and businesses.
Step 6: Recognize that less money in circulation can help reduce spending, which can lower inflation.
Step 7: Conclude that modifying the repo rate is the primary tool the RBI uses to control inflation.

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