On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (August 5, 2024) decided to: Increase the policy repo rate to 5.40% with immediate effect. What will happen to the money supply?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: Decrease in money supply
Repo rate is the rate at which commercial banks borrow from central bank for a short period of time against the approved securities. With increase in the repo rate banks have to pay higher interest. Thus, they would be left with less money to lend it to others. So, we can say any increase in the repo rate would result in decrease in the money supply.