NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
Following a sharp rise in the repo rate by the RBI, which combination of effects is most likely on an economy, other things equal?
A higher repo rate raises borrowing costs, reduces credit demand and puts downward pressure on inflation. This is a tightening of monetary policy. The other options describe the effects of easing, not tightening.
- AHigher borrowing costs, lower credit demand and downward pressure on inflationCorrect
- BLower borrowing costs and higher credit demand
- CHigher money supply and rising inflation
- DRupee depreciation caused directly by lower interest rates
Explanation
A higher repo rate raises banks' funding costs and lending rates, which dampens credit demand and consumption and investment, easing inflation. The other options describe the effects of a rate cut or an easing stance.
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