Case study: Read the given case study and answer the following questions:

"COVID-19 to have significant deflationary impact due to demand evaporation". Ruling out any impact of stimulus on the price situation, Chief Economic Advisor K. V. Subramaniam on Thursday said the COVID-19 pandemic has severely dented the demand for non-essential goods, creating deflationary conditions. He also said that a good part of the Rs 20 lakh crore stimulus package is designed in a manner that the fiscal deficit remains under control.

"COVID has a significant deflationary impact because demand especially for non-essential goods and services will go down significantly. Therefore, it is likely that there would be too much inflationary impact through fiscal deficit or stimulus package". Subramaniam told in an interview.

“The proposed stimulus package will generate demand by infusing liquidity into the system and thus perk up the economy", the CEA said.

"RBI is also taking some strategic actions to control the impact of COVID-19 situation", CEA father added.

RBI may take following step to overcome the deflationary situation:

Decrease margin requirement

The correct answer is Option (3) → Decrease margin requirement

Decrease margin requirement: Margin requirements are the minimum amounts that investors must deposit when borrowing from a broker to buy securities. Decreasing the margin requirement lowers the cost of borrowing, encouraging more borrowing and spending.

Impact on Deflation: This would increase the money supply and liquidity in the economy, encouraging spending and investment, which can help counteract deflation.

Here's an explanation for each option:

Option 1: Increase SLR (Statutory Liquidity Ratio): The SLR is the percentage of a bank's net demand and time liabilities (NDTL) that it must maintain in the form of cash, gold, or government-approved securities before providing credit to customers. Increasing the SLR reduces the funds available for banks to lend, which can decrease the money supply in the economy.

Impact on Deflation: Increasing the SLR would likely worsen deflationary pressures by reducing the liquidity in the market, making it harder for consumers and businesses to access funds.

Option 2: Sell securities in the Open market:When the RBI sells government securities in the open market, it absorbs liquidity from the banking system.

Impact on Deflation: Selling securities would further reduce the money supply, which can exacerbate deflationary conditions as it decreases the amount of money available for spending and investment.

Option 4: Restrict credit creation:Restricting credit creation involves tightening the conditions under which banks can lend money.

Impact on Deflation: Restricting credit would decrease the money supply, which could worsen deflationary pressures by limiting consumer and business access to funds.