RBI plans to reduce the Repo Rate
Context:
Recent SBI research revealed that RBI is planning to reduce the repo rate by 75 basis points.
Relevance:
GS-03 (Economy)
What is the repo rate?
- The repo rate is the interest rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.
- It is a crucial tool used by the RBI to control inflation and regulate the supply of money in the economy.
- When the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate, thereby reducing the money supply in the economy.
- Conversely, a decrease in the repo rate makes borrowing cheaper, leading to an increase in the money supply.
Key effects of the RBI reducing the repo rate:
- Lower Borrowing Costs: Banks can borrow from the RBI at a lower interest rate, reducing their overall cost of funds.
- Cheaper loans for consumers and businesses: Lower interest rates on home loans, car loans, and business loans encourage spending and investment.
- Boost to Economic Growth: Increased borrowing and spending stimulate demand, production, and job creation in the economy.
- Higher Inflation Potential: Lower rates can lead to an increased money supply, potentially pushing up inflation.
- Weaker Rupee and Higher Exports: Lower interest rates may reduce foreign investment in Indian bonds, weakening the rupee but making Indian exports more competitive.
Prelims Question:
What is the most likely impact of the Reserve Bank of India (RBI) reducing the repo rate?
A) Increase in borrowing costs for banks
B) Decrease in money supply in the economy
C) Higher loan interest rates for consumers
D) Boost in economic growth due to cheaper credit
Answer: D) Boost in economic growth due to cheaper credit
