Important Articles

RBI cuts repo rate by 25 bps

In news

The Reserve Bank of India reduced the repo rate by 25 bps to 5.15% on Friday to boost growth while keeping the policy stance accommodative.

Repo rate

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. Repo rate is used by monetary authorities to control inflation.

How Does it affect the economy?

When inflation rises

During high levels of inflation, RBI makes strong attempts to bring down the flow of money in the economy. One way to do this is to increase the repo rate. This makes borrowing a costly affair for businesses and industries, which in turn slows down investment and money supply in the economy. As a result, it negatively impacts the growth of the economy. This also helps bring down inflation.

When RBI wants to flow cash into the system

On the other hand, when the RBI needs to pump funds into the system, it lowers the repo rate. Consequently, businesses and industries find it cheaper to borrow money for different investment purposes. It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy.
Repo Rate Reverse Repo Rate
It is the rate at which RBI lends money to banks It is the rate at which RBI borrows money from banks
It is higher than the reverse repo rate It is lower than the repo rate
It is used to control inflation It is used to manage cash-flow
It involves the sale of securities which would be repurchased in future. It involves the transfer of money from one account to another.

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