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CMA Foundation · Fundamentals of Business Economics and Management · Economic and Business Environment

The Reserve Bank of India raises the repo rate. Other things remaining equal, what is the most likely immediate effect on a business that depends on bank borrowing for working capital?

The firm's cost of borrowing tends to rise. A higher repo rate makes funds costlier for banks, which transmit it through higher lending rates, so businesses relying on bank credit for working capital face increased interest costs, and credit-driven demand generally weakens.

  1. AIts cost of borrowing tends to riseCorrect
  2. BIts cost of borrowing tends to fall
  3. CIts tax liability falls automatically
  4. DIts demand from customers rises because credit becomes cheap

Explanation

A higher repo rate raises the rate at which banks borrow from the RBI, and banks pass this on through higher lending rates. Hence the firm's borrowing cost rises. Cheaper credit and lower tax do not follow from a rate increase.

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