“With an objective to reduce inflation, Reserve Bank of India may promote the commercial banks to park their surplus funds with it.”

Q. “With an objective to reduce inflation, Reserve Bank of India may promote the commercial banks to park their surplus funds with it.” 

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

Ans:  Reverse repo rate is the rate at which commercial banks may park their surplus funds with the Central Bank. 

In order to decrease inflation in an economy, Reserve Bank of India (RBI) may increase the reverse repo rate. With the increase in reverse repo rate, it becomes lucrative for commercial banks to park surplus funds with the central bank. Consequently, this may lead to reduction in their lending capacity. Thereby, fall in the Aggregate Demand curbs the level of inflation.