Repo Rate

#GS-03 Economy

For Prelims

Repo Rate:

  • Repo rate is the rate at which the Reserve Bank of India (RBI) lends to other banks.
  • It is a part of the Liquidity Adjustment Facility (LAF) of the RBI.
  • The increased repo rate will discourage banks to borrow from the RBI and lending to the customers.
  • This in turn will reduce the liquidity and demand in the market.
  • It is part of the contractionary monetary policy.
  • On the other hand, decreased repo rate will encourage banks to borrow and lend to customers increasing the liquidity and demand in the market.
  • This is a part of the Expansionary Monetary Policy.
  • The Monetary Policy Committee (MPC) announced in December 2022 that the repo rate has been increased by 35 basis points and the rate is now 6.25%.

Reverse Repo Rate:

  • The reverse repo rate is the rate of interest that is provided by the Reserve Bank of India while borrowing money from the commercial banks.
  • In other words, we can say that the reverse repo is the rate charged by the commercial banks in India to park their excess money with RBI for a short-term period.

Inflation:

  • Inflation is defined as the rate at which the prices of goods and services rise.
  • In other words, it is the rate at which purchasing power of a consumer decreases.
  • With the same amount of money, if one is buying less quantity of goods, it is termed an increase in the inflation rate.

Types of Inflation:

Demand-Pull Inflation:
  • This type of inflation is caused due to an increase in aggregate demand in the economy.
Cost-Push Inflation:
  • Cost Pull inflation is caused by rise in prices of factors of production like labour, land, capital etc. and also due to artificial scarcity created due to hoarding.

Source “RBI goes slow on rates, limits increase to 35 bps