Increase in reverse repo rate-

The correct answer is Reduces liquidity.

Key Points

• An increase in reverse repo rate reduces liquidity.
• The reverse repo rate is the interest rate at which the central bank borrows money from commercial banks.
• It is a monetary policy instrument that can be used to control the money supply in the country.
• When the central bank increases the reverse repo rate, it becomes more attractive for commercial banks to park their funds with the central bank rather than lending them out.
• This reduces the amount of money available in the market, hence reducing liquidity.

Additional Information

A decrease in liquidity can have a number of effects on the economy, including:

• Higher interest rates: When there is less money in the market, commercial banks have to charge higher interest rates on loans in order to make a profit. This can make it more expensive for businesses to borrow money and invest, which can slow down economic growth.
• Lower inflation: A decrease in liquidity can also help to reduce inflation. This is because when there is less money in the market, people have less money to spend on goods and services. This can lead to a decrease in demand, which can put downward pressure on prices