What is Repo Rate? How increasing repo rate will help to reduce inflation? What is ‘accommodative’ policy?
Repo Rate
What is Repo Rate:
- The interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities
- The higher repo rate will make banks less likely to borrow from the RBI and lend to their customers. As a result, market liquidity and demand will be reduced. It is part of the monetary policy of contraction.
- Lowering the repo rate encourages banks to borrow and lend to customers, increasing market liquidity and demand. Expansionary Monetary Policy is responsible for this.
- By increasing the repo rate, the repo rate is used to control inflation.
- The RBI makes concerted efforts to reduce the flow of money in the economy during periods of high inflation.
- Increasing the repo rate is one way to achieve this.
- As a result, borrowing becomes more expensive for businesses and industries, slowing market investment and money supply.
- As a result, it has a negative effect on economic growth, which helps to keep inflation under control.
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