Question

Read the following text carefully:
“The Reserve Bank of India (RBI) announced a 50 basis point Repo Rate cut to 5.50% from 6%.”
In the light of the given text and common understanding, answer the following questions:

• [(i)] Identify the economic issue indicated in the above text.
• [(ii)] Explain the likely causes and consequences of this step of RBI on the economy.

Hint:

Repo rate ↓ → Loans cheaper → Demand ↑ → Growth ↑

Answer 1

(i) Economic Issue
Concept: Monetary Policy Adjustment
A reduction in repo rate is generally undertaken to:

• Stimulate economic growth
• Increase liquidity in the economy

Answer: \[ \text{Economic slowdown / deficiency of demand (low growth)} \] (ii) Causes and Consequences
A. Likely Causes

Step 1:Low economic growth

• Reduced investment and production
• Decline in industrial output

Step 2:Low demand in economy

• Consumers spending less
• Businesses facing low sales

Step 3:Low inflation

• Inflation under control gives RBI space to reduce rates

B. Consequences of Repo Rate Cut

Step 1:Cheaper loans

• Banks borrow from RBI at lower rate
• Interest rates on loans decrease

Step 2:Increase in investment

• Businesses take more loans
• Expansion of production activities

Step 3:Increase in consumption

• Consumers borrow more (home loans, car loans)
• Demand for goods and services rises

Step 4:Rise in income and employment

• Increased production leads to job creation
• Income levels improve

Step 5:Overall economic impact

• Economic growth is stimulated
• Aggregate demand increases

Conclusion: \[ \text{Repo rate cut is an expansionary monetary policy to boost growth and demand} \]