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NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis

Which statement best describes the effect of a cut in the RBI repo rate, other things remaining equal?

A repo rate cut lowers the rate at which banks borrow from the RBI, reducing their funding costs. This tends to bring down lending rates and supports credit-sensitive sectors such as housing, autos and capital goods, all else equal.

  1. ABanks' borrowing cost from the RBI falls, tending to lower lending rates and support rate-sensitive sectorsCorrect
  2. BBanks' borrowing cost from the RBI rises, tending to reduce credit growth
  3. CThe cash reserve ratio automatically increases
  4. DGovernment borrowing is prohibited from rising

Explanation

The repo rate is the rate at which RBI lends short-term funds to banks against securities. A cut lowers banks' funding costs, which tends to reduce lending rates and help sectors such as housing, autos and capital goods. The other options describe tightening or unrelated effects.

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