The Monetary Policy Committee MPC of the Reserve Bank of India RBI has reduced short term lending ra...........

Economic Affairs Money Supply and Monetary Policy

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has reduced short-term lending rate, or repo rate, by 25 basis points to 6%. What may be the impact of this move on the banking system?

Draining of foreign exchangereserves
Pickup in short-term borrowing due to lowering of interest rates
Sudden increase in international trade and commerce of India

Select the correct answer using the codes below.

1 and 2 only

3 only

2 and 3 only

2 only

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Explanation:

Statement 1: Domestic borrowing and lending do not directly affect the forex reserves.

Statement 2: Repo rate represents the short-term borrowing cost of banks. If it is reduced, banks pass on the lowered borrowing cost to consumers.

Statement 3: There may be an increase in trade and commerce as lowered interest rates lead to higher economic activity and greater exports. However, this will not be a sudden impact, it will take time.