On June 8, the Reserve Bank of India (RBI) released the results of its June policy meeting, with Governor generally expected to raise the repo rate once more in the fight against surging inflation. The policy repo rate was raised 50 basis points to 4.90 percent with immediate effect, as expected. As a result, the standing deposit facility (SDF) rate has been changed to 4.65 percent, while the marginal standing facility (MSF) rate has been adjusted to 5.15 percent, and the Bank Rate has been adjusted to 5.15 percent. RBI has increased the FY23 consumer price index (CPI) inflation forecast to 6.7 percent from 5.7 percent. Inflation is likely to remain above 6 percent in the first three-quarters of the current fiscal. Governor Shaktikanta Das said that the RBI’s steps would be “calibrated, focussed on bringing down inflation to target level". The global economy has been grappling with multi-decadal high inflation and sluggish growth, ongoing geopolitical tensions and sanctions, rising crude oil and other commodity prices, and lingering COVID-19-related supply chain bottlenecks, according to the RBI. The available data for April-May 2022 indicates a broadening of India's economic recovery, according to RBI Governor. Demand in cities is steadily improving, while demand in rural areas is gradually improving. Merchandise exports posted robust double-digit growth for the fifteenth month in a row during May while non-oil non-gold imports continued to expand at a healthy pace, pointing to the recovery of domestic demand. Also, the RBI has decided to allow UCBs to offer doorstep banking services to its customers on par with scheduled commercial banks in order to achieve regulatory uniformity across REs and to give the convenience of banking services to customers at their doorstep

As you can read in the passage that there was an increase in the repo rate by 50 basis points. According to you, what was the reason behind such a decision?

To decrease money supply

The correct answer is Option 1: To decrease money supply

The repo rate is the interest rate at which the central bank (in this case, the RBI) lends money to commercial banks. When the central bank raises the repo rate, it typically aims to decrease the money supply in the economy. This is because a higher repo rate makes borrowing from the central bank more expensive for commercial banks, which in turn can lead to higher interest rates on loans and reduce the amount of money circulating in the economy.

In the context of the passage, the RBI increased the repo rate to address surging inflation. By raising the repo rate, the RBI aims to tighten the money supply, which can help in controlling inflation by making borrowing costlier and reducing spending and investment.