NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
If the Reserve Bank of India raises the repo rate, which of the following is the most likely immediate effect on the economy?
A repo rate increase raises banks' cost of borrowing from RBI, which is passed on to borrowers. Loans become costlier, credit growth and demand slow, and demand-driven inflation tends to ease. It is a tightening step, not an expansionary one.
- ABanks' borrowing costs fall and credit expansion accelerates
- BBorrowing costs rise, tending to reduce credit growth and demand-led inflationCorrect
- CMoney supply is increased through reduced reserve requirements
- DGovernment bond yields necessarily fall sharply
Explanation
The repo rate is the rate at which RBI lends to banks against securities. A higher rate raises banks' funding costs, which are passed to borrowers, dampening credit and demand and so easing inflationary pressure. Bond yields generally rise, not fall.
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