To address a scenario of deficient demand in the economy, the Reserve Bank of India can utilize various monetary policy tools. Here are four specific measures that the RBI can employ to effectively correct the situation:
1. Lowering the Repo Rate: The RBI can lower the repo rate, which is the rate at which it lends money to commercial banks. By reducing the repo rate, borrowing becomes cheaper for banks, leading to a subsequent decrease in lending rates for consumers and businesses. This encourages increased borrowing and spending, which boosts economic activity and helps counteract deficient demand.
2. Open Market Operations: The RBI can conduct open market operations by buying government securities from the market. When the RBI purchases these securities, it injects money into the banking system, increasing the liquidity available to banks. As a result, banks are better equipped to extend loans to individuals and businesses, thereby stimulating demand and economic growth.
3. Cash Reserve Ratio Reduction: The RBI can opt to lower the Cash Reserve Ratio, which is the percentage of bank deposits that banks are required to maintain with the central bank. By reducing the CRR, banks have more funds at their disposal for lending and investment. This move can encourage increased credit flow to various sectors of the economy, leading to higher consumer spending and investment, ultimately addressing the issue of deficient demand.
4. Special Liquidity Facilities: In times of deficient demand, the RBI can introduce special liquidity facilities to provide direct funding support to sectors facing liquidity crunches.