Relationship between repo rate hike and inflation
This query is : Resolved
04 March 2014
repo rate is the rate at which RBI lends to banks for short term loans.
So if RBI wants to curb inflation, it would like to reduce the supply of money in the economy. One way to do is to reduce the availability of money with banks.
So RBI increases REPO rate. This dissuade the banks from borrowing from RBI which in turn results in reduction in supply of money available with banks to lend. This results in overall reduction of supply of money in the economy, thereby resulting in lower demand and lower inflation.
So if RBI wants to curb inflation, it would like to reduce the supply of money in the economy. One way to do is to reduce the availability of money with banks.
So RBI increases REPO rate. This dissuade the banks from borrowing from RBI which in turn results in reduction in supply of money available with banks to lend. This results in overall reduction of supply of money in the economy, thereby resulting in lower demand and lower inflation.
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