RBI abouts------

What is RBI

The RBI is the Central Bank of our nation. The chief function of a central bank is to conduct affairs that would lead to managing the money supply in the country. The central bank has to make sure that the money supply doesn’t exceed or fall grossly short of expected demand in the market. Such adverse miscalculations could lead to inflation or deflation.

RBI’s Role in Market and Money Supply

Just like the government affects the fiscal policy, Reserve Bank of India (RBI) plays a huge role in influencing the monetary policy. The Bank has various tools at its disposal to influence the money supply in the market through its monetary policy. One such tool in the hands of RBI is the repo rate, and this is what the RBI recently slashed. The RBI reduced the repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 7.5 per cent from 7.75 per cent. This was precipitated by strong sentiments from foreign and domestic investors as well as global reduction in fuel prices.

What is RBI Repo Rate?

Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. By controlling the repo rate, and the lending rates to commercial banks, the RBI also indirectly affects the lending rates granted by commercial banks to end consumers. This sums up what RBI Repo Rate is.

How is Repo Rate used by RBI?

Considering all other factors as equal, the central bank of any nation follows the following protocol:

1. Decrease Repo rate in time of low inflation or for boosting the economy:
   When there is low inflation along with low-capacity utilisation and the market demands more supply of money, the RBI decreases the Repo Rate. By decreasing the Repo Rate, the RBI encourages commercial banks to borrow more money from it. These banks in turn will reduce their lending rates to consumers in the form of reduced home loans or car loans. Thus a boost is given to the economy by using the Repo Rate.
2. Increase Repo rate in time of high inflation:Increasing repo rates means that commercial banks don’t borrow money liberally from the RBI, and avoid doing so. This slows down the economic progress, reduces the liquidity in the market, and the reduction in money supply reduces the inflation. This is an important measure in curbing inflation.