What is Repo Rate? Class 12
The repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds.
Additional Information:-
The rate at which the RBI (central bank) offers short-period loans to commercial banks by buying government securities in the open market.
The repo rate is used to control the money supply
An increase in the repo rate increases the cost of borrowing from the central bank. It forces commercial banks to increase their lending rates, which discourages borrowers from taking loans. It reduces the ability of commercial banks to create credit and the money supply is reduced.
On the other hand, a decrease in the repo rate decreases the cost of borrowing from the central bank. it encourages commercial banks to reduce their lending rates, which encourages borrowers to take loans. it increases the ability of commercial banks to create credit and the money supply is increased.
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