Which of the following statements about repo rate is not correct?
(a) At this rate RBI borrows money from banks for short period
(b) A reduction repo rate helps bank to get money at cheaper rate
(c) An increase in repo rate makes borrowings from RBI expensive
(d) At this rate banks borrow money from RBI
Answers
Let’s understand this in layman’s terms.
If there is more money with people = their purchasing power will increase = more people will be ready to buy goods and services = hence demand for goods and services will increase= what will the seller do if he has same no. of items but no. of buyers has increased, he will just increased the prices = price of good will increase = inflation.
So from above we can understand that inflation is caused by
MORE MONEY WITH PEOPLE = MONEY SUPPLY INCREASED = INCREASED INFLATION
To control money supply in the economy. (and thereby fight both inflation and deflation).
RBI implements monetary policy using certain tools and one of them is REPO RATE
REPO RATE= INTERST CHARGED BY RBI in case of borrowing from RBI by BANKS (say SBI) for short term period.
WELL its seems quite normal. BUT wait understand in depth.
SBI chairman Arundhati ma’m wants to borrow Rs.100 crore (for short term).
She gives her stash of government securities to Rajan.
Rajan gives her Rs.100 crore.
Madam Also signs an agreement
“I, Arundhati Bhattacharya, agree to buy same securities from Rajan, at 108 crores after 14
days.”
Notice that she has agreed to “repurchase” same securities from Rajan. Therefore its called
“Repo.” AND THE AGREEMENT IS CALLED REPURCHASE AGREEMENT.
And how much interest rate did she pay on this “loan”? [108-100]/100=8%. That’s our repo rate. ( IT KEEPS ON CHANGING I KEPT IT AT 8% FOR EXAMPLE )
Important:
SBI also has to keep part of her money in RBI approved securities (under SLR).
So Madam cannot USE those government securities to borrow under Repo Rate from Rajan.
BACK TO THE TOPIC.
THERE IS DIRECT RELATIONSHIP BETWEEN AND INFLATION AND REPO RATE.
IF inflation increases in the economy = people has more money with them = RBI governor decides to increase the repo rate so as to drain out the money from the banks and therefore from the economy = If the repo rate for commercial banks increases they will pass this onto their own consumers = Higher interest rates will result in less borrowing by consumers from banks and thus have the effect of reducing spending, investment and economic growth. This will reduce inflationary pressures in the economy.
Answer:
A is the answer
Explanation: