Documentation (Repo Rate Hike by RBI)

1.Explaining Repo Rates and differentiation between Repo Rates and Interest
Rates.
Ans. Repo rates are the rates at which RBI lends money to Commercial Banks,
whereas, Interest Rates are the rates at which the commercial banks lend money to
the business, households etc. Repo rates increase and interest rates hike are directly
proportional as, the commercial banks will compensate for the increasing repo
rates by increasing the interest rate.
2. Reasons for the hike in repo rates.
Ans.
1. Increase in the crude oil prices is adding to the inflationary trends which is
above the 4% target of the RBI.
2. Weakening rupee which is leading to imported inflation.
3. Increase in the harvest due to desirable monsoons and industrial output which is
leading to increased consumer spending and therefore demand-pull inflation.
4. Increased flow of money in the economy, thereby leading to inflation.
5.MSP on Kharif crops is going to lead to increase in the CPI.
6. Widening current account deficit which has various effects such as:
a. Decrease in international credit worthiness rank.
b. Foreigners have greater claim on domestic assets.
3. Why does increased flow of money in the economy cause inflation?
Ans. Quantity theory of Money
MV=PQ where,
M- Quantity of money in the economy.
V= Velocity of Money
Q =GDP
Therefore, being a monetarist, I would propose that, decrease in the flow of money
by increasing the repo rates will lead to decreased inflation.
Explain it using a diagram.
4. Explaining the concept of reverse repo rates.
Ans. Reverse Repo rates are the rates at which the RBI borrows money from the
commercial banks, Increase In the reverse repo rates by 6% will lead to decreased
liquidity of money, thereby controlling the supply of money in the economy and
therefore controlling inflation.
6. Positive effects of Inflation.
1. Can stimulate economic growth.
2. Good for borrowers.
3. Good for the government due to increase in revenue through increased income
of the people.
4. Inflation target between 2-2.5% is desirable.
7. Negatives of Inflation.
1. Increase in unemployment- Philips curve.
2. It can be tight on the wallet.
3. Investments decrease which is not good for a developing country like India.
4.Decreased confidence among consumers and Businesses which will lead to
decreased growth as, the marginal propensity to consume decreases.
5.Fall in real value of income.
6. Uncompetitive economy due to decreased competitiveness of exports.
8. Positives of hiking Repo Rates and reverse repo rates.
1. Decreased supply of money in the economy.
2.Decreased liquidity of the money.
3.Increase the real income of the people as, they can buy more due to decreased
and controlled inflation.
4.Decrease in unemployment-Philips curve.
9.Negatives of hiking repo rates.
1. Borrowers are going to suffer a lot especially the people taking home loans.
2. Increase in the Non-Performing assets due to which banks will become reluctant
to lend money thereby affecting growth.
3.Will impact the common man in the country
4. Not positive for the GDP growth as, decreased flow of money is going to lead to
decreased economic growth in the economy.
5.Decrease in the living standards of the consumers.
6.Could negatively affect people who take medical and education loans.