Question

State and discuss any two monetary tools to control inflationary pressures in the economy.

Answer 1

1. Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR.
   1. SLR is increased to control inflation.
   2. It reduces commercial banks' credit capacity.
   3. As a result, credit contracts and aggregate demand falls.
   4. The fall in AD causes a drop in prices.
2. Cash Reserve Ratio (CRR): The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR).
   1. CRR is increased to control inflation.
   2. It reduces commercial banks' credit capacity.
   3. As a result, credit contracts and aggregate demand falls.
   4. The fall in AD causes a drop in prices.