- 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 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:
- This type of inflation is caused due to an increase in aggregate demand in the economy.
- 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.