As per the following news published in ‘The Hindu’ on 6th August, 2022 : The Monetary ………………….

Question :As per the following news published in ‘The Hindu’ on 6th August, 2022 :
The Monetary Policy Committee (MPC) of the Reserve Bank of India raised the Repo Rate by 50 basis points.’
Identify and explain the likely cause and consequences behind this type of action taken by the Reserve Bank of India.

The correct answer is -The likely cause behind the Reserve Bank of India’s decision to raise the Repo Rate by 50 basis points is to curb inflationary pressures in the economy. When the economy experiences high inflation, it means that the prices of goods and services are increasing at a faster rate than the rate of growth of the economy. In order to control inflation, the central bank may increase the interest rates, which in turn, will reduce the demand for loans and credit, and hence, reduce spending and investment.

The consequence of this action by the Reserve Bank of India is that it will make borrowing more expensive for businesses and consumers, which may reduce their spending and investment. This could, in turn, lead to a slowdown in economic growth and a decrease in employment opportunities. However, this action is necessary to control inflation, which can have harmful effects on the economy in the long run. The decision to raise the repo rate by the RBI indicates the central bank’s commitment to maintaining price stability in the economy.