Question

"With the objective to correct deflation, Reserve Bank of India may decrease Reverse Repo Rate." 

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

Answer 1

The central bank is attempting to rectify the economy's deflationary predicament by lowering interest rates. The rationale for this decision by the central bank is:

1. Reduce interest rates for the general public in order to encourage low-cost borrowing.
2. Firms will invest more in the economy as borrowing levels climb.
3. More investment will boost income, output, and employment, hence increasing the money supply in the economy.
4. Increased money supply will enhance aggregate demand, hence correcting deflation.