BANKING AFFAIRS

Detailed explanation-1: -Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Central Bank of our country i.e. Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.

Detailed explanation-2: -Generally, the repo rate is hiked when the country is reeling under high inflation. On the other hand, it is slashed if the country is headed towards deflation. How does the repo rate impact inflation? A hike in the repo rate increases the interest rate to be paid by the commercial banks on loans from the RBI.

Detailed explanation-3: -Accordingly, the MPC decided to increase the policy repo rate by 25 basis points to 6.50 per cent. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Detailed explanation-4: -Repo rate is used by monetary authorities to control inflation. Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Detailed explanation-5: -An increase in repo rates means an uptick in the cost of borrowing. This is because when the repo rate rises, the borrowing cost for banking institutions also rises, which is passed on to account holders in the form of higher loan and deposit interest rates.