CDS (I) 2023 General Knowledge · Question 65 of 120

Correct — C, Increasing the rate of interest on savings and fixed deposits. Inflation on the demand side is too much money chasing too few goods, so the cure is to take spending power out of circulation. Raise the return on savings accounts and fixed deposits and households are paid to postpone consumption; deposits grow, current spending falls, and the pressure on prices eases. Higher rates also make borrowing dearer, so credit-financed demand for durables and housing cools. The other three options all work the other way — each of them puts more money into the system or drains goods out of it. UPSC has tested the same logic on the monetary side, keying that decreased money circulation is what helps control inflation.

• (a)Increasing the non-planned expenditure on defence, police, etc. — This is extra government spending, and government spending is a component of aggregate demand. Raising it adds to demand while producing nothing that reaches the consumer market, which pushes prices up rather than down.
• (b)Providing more subsidies on exports — An export subsidy does two inflationary things at once. It pays money out into the economy, and it pulls goods out of the domestic market and into foreign ones, so the same rupees at home chase fewer goods.
• (d)Reduction in the cash reserve ratio (CRR) — The exact reverse of an anti-inflation move. A lower cash reserve ratio leaves banks holding less with the Reserve Bank and more to lend, which expands credit and the money supply. To fight inflation the ratio is raised, not cut.

Anti-inflation policy works on the two levers that determine how much money is chasing goods. Monetary tightening raises the price of money — the policy repo rate goes up, deposit and lending rates follow, credit slows and saving becomes more attractive; the quantitative tools such as the cash reserve ratio and the statutory liquidity ratio do the same job by squeezing what banks can lend. Fiscal tightening cuts government spending or raises taxes, so that the state itself adds less to demand. Supply-side steps sit alongside both, easing imports of a scarce commodity or releasing buffer stocks.

Every one of the four options can be sorted by asking a single question: does this put more money in people's hands, or take money out? Only one takes money out. Two of the wrong options are especially instructive because they look like good policy in other contexts — export subsidies help the trade balance and defence spending is a national priority, but neither is an anti-inflation measure. One point of accuracy on the stem: deposit interest rates are set by banks responding to the Reserve Bank's policy stance, not fixed by the Government of India, and the cash reserve ratio is the central bank's instrument too. The question uses 'Government' loosely for public authority in general, so read it as such rather than looking for a purely budgetary answer.

• Higher deposit rates encourage saving and discourage present consumption, so they reduce demand pressure on prices.
• Raising the cash reserve ratio contracts credit; lowering it expands credit, which is inflationary.
• Government expenditure is a component of aggregate demand, so increasing it adds to inflation rather than reducing it.
• Export subsidies both inject money and divert goods away from the home market.
• Under the monetary policy framework the Reserve Bank, through its Monetary Policy Committee, carries the statutory mandate for price stability.

• Assuming that anything the government does actively must be anti-inflationary. Spending more makes inflation worse.
• Getting the direction of the cash reserve ratio backwards. It is raised to fight inflation, not cut.
• Reading export promotion as an anti-inflation tool. It removes goods from the domestic market.

As a pick-the-anti-inflation-measure question, as a which-institution-controls-inflation question, or as a statement item on the direction in which a particular instrument is moved.

• practice — not a real PYQ

  To control inflation, the Reserve Bank of India would normally

  • (a)reduce the repo rate
  • (b)raise the cash reserve ratio
  • (c)buy government securities in the open market
  • (d)lower the statutory liquidity ratio

  Answer(b) raise the cash reserve ratio — it leaves banks with less to lend, contracting credit and the money supply; the other three options all expand liquidity.

• practice — not a real PYQ

  Which one of the following would add to inflationary pressure in an economy?

  • (a)An increase in the personal income tax rate
  • (b)A cut in government capital expenditure
  • (c)A large increase in subsidies
  • (d)An increase in bank deposit rates

  Answer(c) A large increase in subsidies — it injects purchasing power, while the other three withdraw or discourage spending.