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 i 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. State the meaning of repo rate and reverse repo rate.
2. In order to bring down the rate of inflation, outline and discuss the step takes by the Monetary Policy Committee of Reserve Bank of India. 

Answer 1

1. Repo Rate: Repo stands for repurchase option rate. It is the rate at which a country's central bank lends to commercial banks for a brief period of time.
   Reverse Repo Rate: It refers to the reverse repurchase option rate. It is the rate at which a country's central bank accepts deposits from commercial banks. In other words, it is the interest rate at which the RBI borrows funds from the commercial banks of the country.
2. To bring down the rate of inflation, RBI takes the following steps:
   1. Cash Reserve Ratio is increased: It means that commercial banks keep a higher proportion of total deposits with the RBI and have less money available for loan creation with commercial banks. It causes the economy's aggregate demand and price level to fall.
   2. Statutory Liquidity Ratio is increased: It means that commercial banks keep a higher proportion of total deposits with themselves. Furthermore, commercial banks have fewer funds available for credit development. It causes the economy's aggregate demand and price level to decline.
   3. Reverse Repo rate is increased: This means that more money are parked with the RBI, leaving less accessible for loan creation with commercial banks. It causes the economy's aggregate demand and price level to decline.
   4. Repo Rate is increased: It causes the market interest rate to rise. borrowing costs rise while demand for borrowing falls. It causes the economy's aggregate demand and price level to decline.