Correct answer will be A. Consumer Price Index.

RBI's Measures to Address Liquidity Deficit
1. Background
The Reserve Bank of India (RBI) plays a crucial role in managing liquidity in the banking system.
Liquidity refers to the availability of cash and easily accessible funds in the financial system, which impacts lending, interest rates, and overall economic stability.
A liquidity deficit occurs when banks face a shortage of available cash to meet lending and operational requirements.
2. Current Issue
The Indian banking system is experiencing a liquidity crunch, meaning there is less money available for lending.
To counteract this shortage, the RBI plans to inject at least ₹1 trillion (₹1 lakh crore) into the system by the end of March 2025.
The move aims to ensure smooth credit flow, support economic growth, and stabilize interest rates.
3. Reasons for Liquidity Deficit
Advance Tax Payments
Businesses and individuals pay large amounts in advance taxes, especially in March.
This drains money from the banking system, leading to a temporary liquidity shortfall.
Government Borrowing
The government borrows money through bonds and securities to fund various projects.
This reduces the amount of loanable funds available to banks, tightening liquidity.
Festive & Seasonal Demand
Financial year-end activities increase the demand for cash and credit.
Businesses require working capital for inventory and operational needs.
Foreign Exchange Outflows
Increased demand for foreign exchange by importers or foreign investors withdrawing funds can reduce liquidity in the banking system.
Higher Cash Demand
Increased public withdrawals of cash (especially during elections or high-spending periods) can reduce bank reserves, leading to a liquidity shortage.
4. How RBI Will Infuse Liquidity?
The RBI can inject liquidity using several methods:
1. Open Market Operations (OMOs)
RBI buys government securities from banks.
This injects money into the banking system, improving liquidity.
2. Repo Rate Reduction
Repo Rate: The rate at which the RBI lends money to commercial banks.
A reduction in the repo rate makes borrowing cheaper, increasing money supply in the economy.
3. Long-Term Repo Operations (LTRO)
RBI provides long-term loans to banks at lower interest rates.
This ensures long-term liquidity for lending and investments.
4. Cash Reserve Ratio (CRR) Reduction
CRR is the percentage of deposits that banks must keep with the RBI.
A lower CRR frees up more funds for banks to lend.
5. Term Liquidity Facility
RBI can provide funds for specific sectors (e.g., MSMEs, NBFCs) to boost targeted lending.
5. Impact on the Economy
✅ Positive Effects
More Lending by Banks: With increased liquidity, banks can lend more to businesses and individuals, boosting economic growth.
Stable Interest Rates: Prevents sharp increases in borrowing costs, keeping loans affordable.
Boosts Investment and Consumption: More liquidity encourages spending and investment, stimulating economic activity.
❌ Possible Risks
Inflationary Pressure: Excess liquidity can lead to higher inflation if demand increases significantly.
Depreciation of the Rupee: More money supply can reduce the value of the rupee against foreign currencies.
Asset Bubbles: Excess liquidity may drive excessive speculation in stock and real estate markets, creating financial instability.
6. Conclusion
The RBI’s liquidity injection of ₹1 trillion is aimed at ensuring credit availability, economic stability, and smooth financial operations.
However, it must balance liquidity infusion with inflation control to prevent overheating of the economy.
Efficient liquidity management will be crucial for maintaining monetary stability and economic growth in India.
UPSC Relevance
Prelims:
Questions on monetary policy tools, liquidity management.
Example: "What is the impact of Open Market Operations on liquidity in the economy?"
Mains:
Analytical questions on RBI’s liquidity management and economic implications.
Example: "Discuss the role of the RBI in managing liquidity and ensuring financial stability in India."

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