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What is the effect of a decrease in the repo rate by the RBI?

Practice Questions

Q1
What is the effect of a decrease in the repo rate by the RBI?
  1. Increased borrowing costs
  2. Decreased liquidity in the market
  3. Encouragement of borrowing and spending
  4. Reduction in bank profits

Questions & Step-by-Step Solutions

What is the effect of a decrease in the repo rate by the RBI?
  • Step 1: The Reserve Bank of India (RBI) sets the repo rate, which is the interest rate at which banks borrow money from the RBI.
  • Step 2: When the RBI decreases the repo rate, it means banks can borrow money at a lower cost.
  • Step 3: With lower borrowing costs, banks are more likely to take loans from the RBI.
  • Step 4: When banks borrow more, they have more money to lend to businesses and consumers.
  • Step 5: More lending means that businesses can invest and consumers can spend more.
  • Step 6: Increased spending and investment can help boost the economy.
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