Question

As per the following news published in ‘The Hindu’ on 6^th August, 2022:

'The Monetary Policy Committee (MPC) of the Reserve Bank of India raised the Repo Rate by 50 basis points.'

Identify and explain the likely cause and consequences behind this type of action taken by the Reserve Bank of India.

Answer 1

It states that the RBI has raised the repo rate by 50 basis points.

Repo stands for repurchase option rate. It is the interest rate at which a country's central bank lends to commercial banks for a brief period of time.

Likely cause: The RBI hiked the repo rate to combat inflationary pressures in the economy. It may aid in decreasing the economy's money supply or liquidity.

Consequence: The market rate of interest will climb as the Repo rate rises. Capital costs will grow, but loan demand will shrink. It will also cause a drop in aggregate demand and a drop in the economy's price level.