- Repo rate is the interest rate at which RBI provides overnight liquidity to banks.
- It is also called the “Policy Rate”.
- Influence on Inflation:
- When RBI increases repo rate, banks’ borrowing cost rises.
- This leads to higher lending rates for customers.
- Higher lending rates discourage borrowing and spending.
- This reduces aggregate demand, helping to control inflation.
- Conversely, lowering repo rate can stimulate demand and potentially increase inflation.
- Influence on Economic Growth:
- Lowering repo rate reduces lending rates.
- This encourages borrowing for consumption and investment.
- Increased investment and consumption boost aggregate demand.
- This stimulates economic activity and promotes growth.
- Higher repo rate can slow down economic growth.