NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
When the Reserve Bank of India raises the repo rate while other factors remain unchanged, which is the most likely effect on the economy?
A higher repo rate makes borrowing from the RBI costlier for banks, which tends to push up lending rates and dampen credit demand and inflation. It does not raise liquidity or lift bond prices, and it generally does not weaken the rupee.
- ABanks' borrowing from RBI becomes costlier, tending to raise lending rates and reduce credit demandCorrect
- BLiquidity in the banking system rises sharply, tending to lower lending rates
- CBond prices rise because yields fall immediately
- DThe rupee is certain to depreciate sharply
Explanation
A higher repo rate raises the cost at which banks borrow from RBI, which tends to pass through to higher lending rates and subdued credit demand. Higher rates generally push bond yields up and prices down, and they tend to support rather than weaken the currency.
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