Question

explain how repo rate can be helpful in controlling credit creation

Answer 1

How repo rate and bank rate control credit supply?

Bank rate and the repo rates are the rates at which RBI gives loans to the banks.

Banks earn their income by supplying loans to businesses out of deposits made by people and earn interest income out of such loans.
When there is an increase in borrowing rates from RBI,the banks have no option but to increase interest rates charged from businesses in order to set off increased cost of borrowed capital.
So whenever repo and bank rates increase, the cost of borrowing for business houses too increases and hence incentive to further investment decreases.
Such decrease in investment is primarily advocated in inflationary periods to curtail further aggregate demand in the economy, which will push prices further up.
Such increase in rates therefore, lead to less loans,hence less credit creation.