Consider the following statements regarding instruments of Monetary Policy: 1. The Central Bank can increase the money supply by increasing the bank rate 2. The Central Bank can increase the money supply by purchasing securities from the public 3. The Central Bank can decrease the money supply by increasing the cash reserve ratio Which of the statements given above is/are correct?

Monetary policy instruments are used by the Central Bank to regulate liquidity. Statement 1 is incorrect because increasing the bank rate (the rate at which the central bank lends to commercial banks) makes borrowing more expensive, leading to a decrease in the money supply. Conversely, a fall in the bank rate increases the money supply. Statement 2 is correct; when the Central Bank purchases government securities through Open Market Operations (OMO), it injects liquidity into the economy, thereby increasing the money supply [1][4]. Statement 3 is correct because the Cash Reserve Ratio (CRR) is a quantitative tool; increasing it requires banks to keep more reserves with the Central Bank, reducing their lending capacity and decreasing the overall money supply [1]. Therefore, only statements 2 and 3 are correct.

Sources

1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
2. [4] https://www.imf.org/en/about/factsheets/sheets/2023/monetary-policy-and-central-banking