Answer:
Repo rate: The rate at which the central bank (RBI) lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have shortage of funds, they can borrow from RBI. When the repo rate falls, it helps the banks get money at cheaper rate and vice versa. When the repo rate is increased, banks are compelled to pay higher interest to RBI which prompts them to raise the interest rates on the loans that they offer to their consumers. It becomes costlier for the consumers to take loans, which leads to shortage of money in the economy and less liquidity. This way repo rate helps in controlling the credit creation.
Thus, a rise in repo rate restricts the flow of money and credit in an economy.
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