Q26 of 50 Page 1

Explain how 'Repo Rate' can be helpful in controlling credit creation.

● Repo rate is the rate of interest at which the central bank lends money to the commercial banks for a short period of time.


● Repo rate can be very useful in controlling credit creation.


● If the repo rate is increased, the cost of borrowing becomes costlier than before.


● So, the banks increase their rate of interest in return.


● The cost of borrowing increases for the people and they borrow less.


● Thus, the banks reduces its level of credit creation.


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