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The graph given below indicates the changes in key policy rates made by the Central Bank several times in a year:

quesOptionImage1284

Which one of the following can be the most likely reason for the Central bank for such an action?

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UPSC Civil Services Exam (Prelims) Official Paper (Held On: 2018)
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  1. Encouraging foreign investment
  2. Increasing the liquidity
  3. Encouraging both public and private savings
  4. Anti-inflationary stance

Answer (Detailed Solution Below)

Option 4 : Anti-inflationary stance
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Detailed Solution

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Calculations:

From July '2' to June '16' it is almost one year. In this duration repo rate and reverse repo rate is going to increase continuously Wherever CRR is fixed. This only happens to control the inflation in the market. So whenever the central bank resists the policy rate, it is a way to suck out liquidity from the system. Normally this is due to the central bank expectation of rising inflation. Hence a continuously rising repo rate indicates an anti-inflationary stance.

∴ Option 4 is correct 

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