To tame high headline inflation in an overheating economy, which combination of monetary policy actions would the Reserve Bank of India (RBI) typically execute?

[ A ]Slash the Repo Rate to zero and print unlimited currency to stimulate consumer spending.

[ B ]Order all commercial banks to forgive 100% of outstanding home loans immediately.

[ C ]Increase the policy Repo Rate and raise Cash Reserve Ratio (CRR) / Statutory Liquidity Ratio (SLR) to drain surplus liquidity and increase borrowing costs.[ CORRECT ]

[ D ]Abolish all reserve ratios and mandate commercial banks to lend without credit collateral.

Takeaway

Option C is correct: Increase the policy Repo Rate and raise Cash Reserve Ratio (CRR) / Statutory Liquidity Ratio (SLR) to drain surplus liquidity and increase borrowing costs.

Derivation

Contractionary monetary policy is employed by central banks to control surging inflation. By hiking the Repo Rate (the rate at which commercial banks borrow short-term funds against collateral from RBI), the central bank raises the cost of funds across the entire banking system, which translates into higher lending rates on retail and corporate loans. Concurrently, raising CRR (cash required to be held with RBI) or SLR drains loanable liquidity from the banking system, cooling aggregate demand. This tests monetary transmission tools. The common error is confusing anti-inflation tightening with stimulus rate cuts.

Why the others fail

A — Slash the Repo Rate to zero and print unlimited currency to stimulate consumer spending.

Slashing policy rates and pumping liquidity accelerates economic overheating and severely exacerbates inflationary spikes.

B — Order all commercial banks to forgive 100% of outstanding home loans immediately.

The central bank does not arbitrarily cancel commercial bank loan assets; its mandate is price stability and financial supervision.

D — Abolish all reserve ratios and mandate commercial banks to lend without credit collateral.

Abolishing reserve ratios increases systemic liquidity and credit risk, completely contrary to anti-inflationary monetary policy.