Which of the following medium is used by the Reserve Bank of India to regulate the money supply?

The correct answer is Monetary policy.

Key Points

• The Reserve Bank of India (RBI) uses monetary policy as a tool to regulate the money supply in the economy.
• Monetary policy involves the management of interest rates and the total supply of money in circulation and is generally aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.
• The RBI conducts monetary policy through mechanisms such as Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR).
• By adjusting these rates, the RBI can influence the availability and cost of credit in the economy, which in turn affects overall economic activity.
• Monetary policy can be either expansionary (aimed at increasing the money supply) or contractionary (aimed at decreasing the money supply).

Additional Information

• Repo Rate
  • The rate at which the RBI lends money to commercial banks in case of any shortfall of funds.
  • It is used by monetary authorities to control inflation.
• Reverse Repo Rate
  • The rate at which the RBI borrows money from commercial banks.
  • It is used to control the money supply in the economy.
• Cash Reserve Ratio (CRR)
  • The percentage of a bank's total deposits that must be maintained with the RBI in the form of reserves or deposits.
  • It ensures that banks do not run out of cash to meet the withdrawal demands of their customers.
• Statutory Liquidity Ratio (SLR)
  • The percentage of a bank's net demand and time liabilities that must be maintained in the form of liquid assets.
  • It is used by the RBI to control the expansion of bank credit.
• Open Market Operations (OMO)
  • Refers to the buying and selling of government securities in the open market by the RBI.
  • It helps in regulating the money supply and interest rates in the economy.