Why RBI increase Repo rate to control inflation ?

Question

Accepted Answer

RBI increases Repo rate to control inflation by reducing money supply and increasing cost of borrowing.

Repo rate is the rate at which RBI lends money to commercial banks.
When RBI increases Repo rate, it becomes expensive for banks to borrow money from RBI.
Banks then increase their lending rates to customers, which reduces borrowing and spending.
This reduces money supply in the economy, which helps in controlling inflation.
For example, if inflation is high, RBI may increase Repo rate from 5% to 6%.
This will increase the cost of borrowing for banks, which will then increase their lending rates to customers.
As a result, people will borrow less and spend less, which will reduce money supply and control inflation.

Accepted Answer

As Repo rate increases banks also increases interest to its customers who eventually pay more EMI to the bank hence as a result have to spend more money on EMI and has less purchasing power therefore demand for products decreases and so the prices decrease

Why RBI increase Repo rate to control inflation ?

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