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UPSC » Daily News Analysis ‘Repo Rate’ : 6 December

Daily News Analysis ‘Repo Rate’ : 6 December

Table of Content

Why in News?

  • The Reserve Bank of India announced large-scale liquidity injection through Open Market Operations.

Repo Rate 

  • The repo rate is the interest rate at which the Reserve Bank of India lends money to commercial banks against government securities.
  • It is the main policy rate used by the RBI to control inflation and liquidity.
  • A higher repo rate makes borrowing costlier for banks, while a lower repo rate makes borrowing cheaper.
  • It directly affects interest rates in the banking system.
  • It is decided by the Monetary Policy Committee of the RBI.

Impact of a Repo Rate Cut

  • A repo rate cut reduces the cost of borrowing for banks.
  • Banks may lower loan interest rates for customers.
  • It encourages higher borrowing and spending in the economy.
  • It supports economic growth during slowdowns.
  • It may increase the risk of higher inflation if money supply rises too fast.

DO YOU KNOW

Open Market Operations (OMO) 
  • Open Market Operations are the buying and selling of government securities by the Reserve Bank of India in the open market.
  • OMO is used to regulate liquidity in the banking system.
  • When the RBI buys securities, it injects money into the economy.
  • When the RBI sells securities, it absorbs excess money from the system.
  • OMO is a direct tool of monetary policy and works on a longer-term basis than repo operations.