What do you understand by repo rates and what are its implications for raising the rates.(Economy)

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. It is policy rate for India and monetary policy committee decides the repo rate

                Implications of rising repo rates:

  • Higher repo rate leads to higher interest rates and eventually it will make loans costlier.
  • In case of higher repo rate , corporate borrowing will become costlier so it can reduce the cash and credit flow.
  • Higher repo rates will lead to increase in the value of Indian assets, which in turn will attract for capital inflow.
  • There will be fall in exports and increase in imports.
  • It will reduce the inflation because of decrease in demand.

Repo rates is policy rate in India and it is the anchor policy rate. Monetary policy committee headed by RBI governor target inflation under the range of 4+/-2. Hence it is an important tool for country like India.

 

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