Transmission of Repo Rate

Abstract

Repo Rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds and used by monetary authorities to control inflation. In the event of inflation, RBI increases Repo Rate as this would act as a disincentive for banks to borrow from RBI. Such a measure on part of RBI would reduce the money supply at the disposal of commercial banks and consequently in the economy which will help in arresting inflation. But in the event of declining inflationary pressures, RBI takes a contrary view and reduces the Repo Rate. A study of Repo Rate would reveal that the functions of RBI do not provide anywhere for its use to make the banks determine their lending rates based on Repo Rate.