Repo Rate UPSC Notes

What is Repo Rate? How increasing repo rate will help to reduce inflation? What is ‘accommodative’ policy?

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.