Question

Read the following text carefully. Answer the given questions on the basis of the same and common understanding:

On 30th September 2022, the Reserve Bank of India (RBI) raised Repo Rate for the fourth time in a row. The Monetary Policy Committee (MPC) decided to raise the policy rate by 50 basis points (1 basis point = `1/100`th  of a percent). After this announcement, the new repo rate stands at 5.9%, while the reverse repo rate continues to stand at 3.35%. Commercial banks borrow money from the Central Bank, when there is a shortage of funds. With the surge in the repo rate, borrowings by general public will become costlier. This is because, as RBI hikes its repo rate, it becomes costly for the banks to borrow short term funds from the Central Bank. As a result, the banks hike the rates at which customers borrow money from them to compensate for the hike in the repo rate. This happens because banks offer loans to retail consumers at an interest rate which is generally, directly proportional to the repo rate. The increase of 0.50 percent in repo rate will lead to a higher interest rates on loans for borrowers, implying that the Equated Monthly Instalments (EMIs) for repaying the existing loans will also increase.

1. Define 'Repo Rate'.
2. Outline the recent change made by the Monetary Policy Committee of Reserve Bank of India in the repo rate.
3. "Increase in repo rate is an important tool used by Monetary Policy Committee to combat the situation of inflation in the Economy." Justify the given statement.

Answer 1

1. Repo Rate: REPO is repurchase option rate. Repo rate refers to the rate at which a nation's central bank lends money to commercial banks for a short period of time.
2. The Repo rate was increased by 50 basis points, or 0.50%, by the RBI's Monetary Policy Committee. Following the final decision, the new Repo rate is 5.9%.
3. Yes, the Monetary Policy Committee uses the increase in the REPO rate as a key instrument to address the inflationary situations facing the economy.
   RBI raises the repo rate. It implies that commercial banks will pay more to borrow money. Commercial banks take the next step of raising their lending rates or the market interest rates at which they grant loans to the general population. Credit gets more expensive or costs more. It causes credit demand to decline, which in turn causes the economy's total demand and price level to decline. Inflation is regulated in this manner.