A) It will increase the cost of borrowing of the government
B) It will increase the cost of borrowing of the banks
C) It will adversely affect the lending capacity of banks
D) None of these
Correct Answer: B
Solution :
[b] The repo or repurchase rate is the interest charged by the RBI to banks when they approach it for short term loans. The repo rate is linked to the interest rate borrowers pay when they take loans from banks because the latter always charges interest which is higher than the existing repo rate. Hence, lower repo rates could induce lenders into lowering the interest rates they charge from individual borrowers too, thereby making credit more affordable.
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