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If Reserve Bank of India (RBI) increases repo rate, rate of interest of the loans offered by the bank ________.
- a)Decreases
- b)Becomes zero
- c)Becomes 100%
- d)Increases
- e)None of the above
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
If Reserve Bank of India (RBI) increases repo rate, rate of interest o...
Increasing Repo Rate and its Impact on Interest Rates
Increasing Repo Rate:
- When the Reserve Bank of India (RBI) increases the repo rate, it means that commercial banks will have to pay a higher interest rate to borrow money from the RBI.
- The repo rate is the rate at which the RBI lends money to commercial banks for short periods.
- By increasing the repo rate, the RBI aims to control inflation by making it more expensive for banks to borrow money, leading to a decrease in the money supply in the economy.
- This, in turn, helps in reducing consumer spending and curbing inflationary pressures.
Impact on Interest Rates of Loans:
- When the RBI increases the repo rate, commercial banks also increase the interest rates on loans they offer to customers.
- This is because banks need to cover the higher cost of borrowing from the RBI by charging higher interest rates on loans to maintain their profit margins.
- Therefore, when the repo rate goes up, the rate of interest on loans offered by banks also increases.
- As a result, borrowers will have to pay more in terms of interest on their loans, which can make borrowing more expensive and lead to a decrease in borrowing and spending in the economy.
In conclusion, when the RBI increases the repo rate, it leads to an increase in the rate of interest on loans offered by banks. This can have an impact on consumer spending, borrowing patterns, and overall economic activity in the country.
Increasing Repo Rate:
- When the Reserve Bank of India (RBI) increases the repo rate, it means that commercial banks will have to pay a higher interest rate to borrow money from the RBI.
- The repo rate is the rate at which the RBI lends money to commercial banks for short periods.
- By increasing the repo rate, the RBI aims to control inflation by making it more expensive for banks to borrow money, leading to a decrease in the money supply in the economy.
- This, in turn, helps in reducing consumer spending and curbing inflationary pressures.
Impact on Interest Rates of Loans:
- When the RBI increases the repo rate, commercial banks also increase the interest rates on loans they offer to customers.
- This is because banks need to cover the higher cost of borrowing from the RBI by charging higher interest rates on loans to maintain their profit margins.
- Therefore, when the repo rate goes up, the rate of interest on loans offered by banks also increases.
- As a result, borrowers will have to pay more in terms of interest on their loans, which can make borrowing more expensive and lead to a decrease in borrowing and spending in the economy.
In conclusion, when the RBI increases the repo rate, it leads to an increase in the rate of interest on loans offered by banks. This can have an impact on consumer spending, borrowing patterns, and overall economic activity in the country.
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If Reserve Bank of India (RBI) increases repo rate, rate of interest o...
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Thus, the money supply will decrease with the bank which will mean that the rate of interest on loans offered by the bank will increase.
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