Which tool is most commonly used by the Reserve Bank of India to regulate liquidity in the economy?
Repo rate adjustment
The repo rate, the rate at which the Reserve Bank of India lends short-term funds to commercial banks against government securities, is the most commonly used monetary policy tool to regulate liquidity in the economy.
By raising the repo rate, the RBI makes borrowing costlier and reduces liquidity to control inflation, while lowering it injects more liquidity to boost economic activity, unlike fiscal stimulus, subsidies, or tariffs, which are fiscal or trade measures handled by the government rather than the central bank.
Hence, repo rate adjustment is the tool most commonly used by the RBI to regulate liquidity.
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