Reserve bank of India, with the help of monetary policies try to influence the money supply. Which of the following would result in an increase in the money supply in the economy?

1. Increase in the bank rate
2. Decrease in the tax rate
3. Decrease in the cash reserve ratio
4. Increase in statutory liquidity ratio

Only 3

In order to increase the money supply in the economy the government would decrease the cash reserve ratio. CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. When CRR is reduced the banks have extra money from which it can create credit, that means an increase in money supply. Whereas, increase in bank rate and SLR works in the negative direction to reduce the money supply. Tax rate is not managed by the RBI, it is a part of fiscal policy.

Bank rate refers to rate at which the Central bank lends money to its clients for long term. An increase in this rate means that the Central bank is following a tight monetary policy as increase in rates will lead to decrease in money supply thereby leading to decrease in inflation and reduction in investment.

If the SLR increases, it restricts the bank's lending capacity and helps in controlling the inflation by soaking the liquidity from the market. Consequently, banks will have less money available to lend, and they will charge higher interest rates on loans to keep up with their profit margin. Opposite will happen in case of a decrease in SLR.

Increase or decrease of tax rate is not a part of Monetary policy and hence not relevant for increasing or decreasing money supply.