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Read the following text carefully. Answer the given questions on the basis of the same and common understanding:
On30 th =
) 5.9 % 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.
On
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.
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Question : 25
Total: 52
"Increase in repo rate is an important tool used by Monetary Policy Committee to combat the situation of inflation in the Economy."
Solution:
Yes, increase in REPO rate is an important tool used by Monetary Policy Committee to combat the situation of inflation in the economy.
RBI increases Repo Rate. It means cost of borrowing for commercial banks increases. As a follow up action, Commercial banks increase the lending rate or the market rate of interest at which it gives loan to public. Cost of credit increases or credit becomes dearer. It leads to decrease in demand for credit which further leads to fall in aggregate demand and price level in the economy. In this way, Inflation is controlled.
RBI increases Repo Rate. It means cost of borrowing for commercial banks increases. As a follow up action, Commercial banks increase the lending rate or the market rate of interest at which it gives loan to public. Cost of credit increases or credit becomes dearer. It leads to decrease in demand for credit which further leads to fall in aggregate demand and price level in the economy. In this way, Inflation is controlled.
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