Reserve Bank of India raised the repo rate by 40 basis points in May 2022. Now consider the following statements:
1. Repo rates are increased to control inflation.
2. With increase in repo rates, cost of borrowing money increases.
3. With reduction in repo rates, industry gets loans at higher rates from the lender.
4. To decrease money supply in the economy, the RBI hikes up repo rates to encourage banks for borrowing funds.
Select the correct statements using the code given below:
Options
A1 and 2 only
B2 and 3 only
C3 and 4 only
D1 and 4 only
Show AnswerHide Answer
Correct Answer
A1 and 2 only
Model Answer
Repo Rate
The cost of borrowing for banks will increase when the repo rate increases, and vice versa. Hence statement 2 is correct
The RBI works hard to reduce the flow of money into the economy when inflation is high. Increasing the repo rate is one method of achieving this. Hence statement 1 is correct.
Home loans, EMIs, and other types of loans typically have lower interest rates when the repo rate is decreased, making it simpler for customers to obtain loans from banks. Hence statement 3 is incorrect.
Repo rate is the interest rate at which a nation's central bank (in India, the Reserve Bank of India) loans money to commercial banks in the event of a funding shortage. Monetary authorities use the repo rate to manage inflation.
In times of inflation, central banks raise the repo rate since doing so discourages banks from borrowing from them. In the end, this lowers the amount of money available to the economy, which aids in halting inflation. Hence statement 4 is incorrect.
Diagram titled Repo Rate Mechanism showing the central bank lending to commercial banks at the repo rate, which passes on to loan borrowers as higher or lower interest rates.
