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.

Question

Accepted Answer

Analysis of MPC raising Repo Rate by 50 basis points:

Identification:
1. This is a monetary policy action by RBI
2. Contractionary policy to control inflation
3. Part of tightening cycle

Explanation:
1. Increase in Repo Rate raises cost of borrowing
2. Banks increase their lending rates
3. Borrowing becomes expensive
4. Consumption and investment decrease
5. Aggregate demand falls
6. Money supply decreases
7. Inflation is controlled

Impact:
- Higher interest rates in economy
- Reduced credit growth
- Lower inflation
- Slower economic growth
- Improved price stability