Economics · Monetary Liquidity Tools
Consider a situation where the Indian equity market is experiencing a massive bull run driven by retail participation, while the manufacturing sector is slowing down due to high input costs. The RBI is worried about asset bubbles and conducts a Variable Rate Reverse Repo (VRRR) auction to absorb Rs 2 lakh crore from the banking system. How would the interconnection of markets likely manifest in this tightening stance?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The forex market would respond by making the Rupee the primary legal tender in global western markets, ending the role of the US Dollar.
- 2The manufacturing sector would immediately recover because sucking out liquidity from banks makes industrial raw materials free of cost.
- 3A VRRR auction would cause the equity market to double in value because investors prefer lower liquidity in the banking system.
- 4The immediate rise in call money rates would signal to the equity market that the 'easy money' era is tightening, potentially leading to a correction in stock prices as the cost of margin funding increases.✓
Correct answer
The immediate rise in call money rates would signal to the equity market that the 'easy money' era is tightening, potentially leading to a correction in stock prices as the cost of margin funding increases.
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