Increase in reverse repo rate-

Correct option is B

The correct answer is (b) Reduces liquidity.

Explanation:
• The reverse repo rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks.
• Increasing the reverse repo rate encourages banks to park more of their surplus funds with the RBI, as the higher rate of return makes it more attractive.
• This action effectively reduces the amount of money circulating in the economy, or reduces liquidity, as banks will lend less to the public and keep more funds with the central bank.

Information Booster:
• Reverse repo rate is used by the RBI to manage short-term liquidity in the economy.
• A higher reverse repo rate can help control inflation by tightening liquidity and discouraging excessive borrowing.

Additional Knowledge:
Increases liquidity 
• A lower reverse repo rate would increase liquidity, as it encourages banks to lend more, but an increase in the rate reduces liquidity.

Does not affect liquidity 
• The reverse repo rate has a direct impact on liquidity in the short term, so this option is incorrect.

Affects long-term interest rate and fixed capital investment 
• While the reverse repo rate affects short-term liquidity, its direct impact on long-term interest rates and fixed capital investment is more indirect, mainly through its influence on monetary policy.