Why is Rbi sometimes reluctant to lower the repo rate even when investment is low because of high market rate of interest
Answers
Answer:
Explanation:
RBI is reluctant to lower the repo rate in this situation because after a certain point of RBI reduces the repo rate,the cost of borrowing from the RBI would decrease. It increases the ability of commercial banks to create credit. Low cost of borrowing enables the commercial banks to decrease their lending rates, which encourages the borrower to take loans and then the money supply in the economy i.e with the public increases which adversely leads to excess demand or inflation in the economy.
Why is Rbi sometimes reluctant to lower the repo rate even when investment is low because of high market rate of interest?
The RBI sometimes becomes reluctant to reduce the repo rate because RBI has its own limit to reduce repo rates. After a certain point he cannot reduce the repo rates beyond the point, if he does so, the cost of borrowing from the RBI will be reduced. With this, commercial banks can also reduce their lending rates.
For this reason, people will be more inspired to take loans and will affect the supply of money in the economy. This may adversely affect the economy.
Repo rate refers to the rate at which RBI pays money to financial institutions in India against government securities. When the RBI reduces the repo rate, the economy is boosted, economic growth is restricted when it is high.
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