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Read the following text carefully. Answer the given questions on the basis of the same and common understanding:
On30 th ( 1. =
) 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 : 5
Total: 5
Outline and discuss the measure taken by the Monetary Policy Committee of Reserve Bank of India to control inflation.
Solution:
To control inflation, RBI takes the following steps:
(i) Cash Reserve Ratio is increased: It means that more percentage of total deposits are kept with RBI by commercial banks and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(ii) Statutory Liquidity Ratio is increased: It means that more percentage of total deposits are kept with themselves by commercial banks and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(iii) Reverse Repo rate is increased: It means more funds are parked with RBI and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(iv) Repo Rate is increased: It leads to increase in market rate of interest. Cost of credit increases and demand for credit decreases. It leads to fall in aggregate demand and price level in the economy.
(i) Cash Reserve Ratio is increased: It means that more percentage of total deposits are kept with RBI by commercial banks and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(ii) Statutory Liquidity Ratio is increased: It means that more percentage of total deposits are kept with themselves by commercial banks and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(iii) Reverse Repo rate is increased: It means more funds are parked with RBI and lesser funds are available for credit creation with commercial banks. It leads to fall in aggregate demand and price level in the economy.
(iv) Repo Rate is increased: It leads to increase in market rate of interest. Cost of credit increases and demand for credit decreases. It leads to fall in aggregate demand and price level in the economy.
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