RBI’s monetary policy committee increases repo rate by 50 bps to 4.90%. Increase in repo rate, the rate at which RBI lends money commercial bank, increases the interest rates at which the banks provide loans.

Commercial banks borrow from RBI by pledging securities at a rate known as repo rate with the option to repurchase them, usually to increase the liquidity in the event of any shortfall of funds. Repo stands for rate of repurchase.

Reverse repo rate is the rate at which the banks invest their surplus funds with RBI. The reverse repo rate also remain unchanged at 3.35%.

On the recommendations of Urjit Patel Committee which was constituted in 2014 to ‘Review and Strengthen the Monetary Policy Framework’ the RBI introduced repo and reverse repo rates India adopted inflation targeting as their monetary policy framework.

What happens when repo rate increases?

  1. Interest on loans provided by the commercial banks increases.
  2. Demand on currency goes down.
  3. Reduces inflation on a short term basis.
  4. As a result, it eases inflation.

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