Which financial instrument is primarily used by the RBI to control inflation?

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Question: Which financial instrument is primarily used by the RBI to control inflation?

Options:

Correct Answer: Reverse repo rate

Solution:

The reverse repo rate is used by the RBI to control inflation by absorbing excess liquidity from the banking system.

Which financial instrument is primarily used by the RBI to control inflation?

Which financial instrument is primarily used by the RBI to control inflation?

Step 1: Understand what the RBI is. The RBI stands for the Reserve Bank of India, which is the central bank of India.
Step 2: Learn about inflation. Inflation means that prices of goods and services are rising, which can reduce the purchasing power of money.
Step 3: Know the tools the RBI uses to control inflation. One of these tools is the reverse repo rate.
Step 4: Understand what the reverse repo rate is. It is the rate at which the RBI borrows money from commercial banks.
Step 5: Learn how the reverse repo rate helps control inflation. When the RBI increases the reverse repo rate, it encourages banks to deposit more money with the RBI, which reduces the amount of money available in the banking system.
Step 6: Realize that by absorbing excess money from the system, the RBI can help keep inflation in check.

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