Q.How does the Reserve Bank of India control credit to fight inflation? Explain briefly.

To fight inflation the RBI pursues a contractionary (dear-money) policy, tightening every lever that governs the volume and cost of credit. …

Inflation is typically driven by excess aggregate demand, often fuelled by too much credit. To fight it, the RBI adopts a contractionary (dear-money) monetary policy, using its instruments to reduce the volume and raise the cost of credit:

1. Raising the Bank Rate / Repo Rate. Costlier borrowing by banks from the RBI leads banks to raise their own lending rates, so borrowing and spending fall.
2. Raising the Cash Reserve Ratio (CRR). Banks must keep a larger fraction of deposits with the RBI, leaving less to lend; the credit multiplier ($1/r$) shrinks, so total credit creation falls.
3. Raising the Statutory Liquidity Ratio (SLR). Banks must hold more in liquid assets, further reducing funds available for lending.
4. Selling government securities (Open Market Operations). When the RBI sells securities, buyers pay with cash drawn from banks, reducing banks' reserves and their lending capacity. …

A frequent slip is describing the expansionary measures (lowering rates, buying securities) — those are for fighting recession, not inflation. To …