Question

"With the objective to correct deflation, Reserve Bank of India may decrease the Bank rate." 

Discuss the rationale behind the step taken by the Reserve Bank of India (RBI).

Answer 1

The central bank attempts to address the economy's deflationary state by lowering the bank rate. The central bank's justification for this action is:

1. To lower interest rates for the general public in order to promote low-cost borrowing.
2. Higher borrowing amounts will result in higher levels of corporate investment in the economy.
3. Increased investment will boost output, employment, and income, which will raise the economy's money supply. 
4. Deflation will be addressed if the money supply is increased because this will raise aggregate demand.