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

Question

Accepted Answer

Two monetary tools to control inflationary pressures:

1. Repo Rate Increase:
- RBI increases the rate at which it lends to commercial banks
- This increases cost of funds for banks
- Banks raise their lending rates
- Borrowing becomes expensive
- Consumption and investment decrease
- Aggregate demand falls
- Price level decreases

2. Open Market Operations (Sale of Securities):
- RBI sells government securities in open market
- Banks and public buy securities
- Money flows from banks to RBI
- Banks' reserves decrease
- Credit creation capacity reduces
- Money supply decreases
- Aggregate demand falls
- Price level decreases