Question
A reduction in repo rate by RBI may not be transmitted into lending rate in the economy because of:
Select the correct answer using the code given below:
- Banks cost of funds remaining high
- Government offering higher interest on its own savings schemes
- Liquidity crunch in the economy
Select the correct answer using the code given below:
Answer: Option D
Answer: (d)
The price of a product depends on its cost of production and its demand in the market both. If cost of production increases then the price of the product will increase and if cost of production does not increase but if demand increases then also price will increase because suppliers will sell at a higher rate. Apply the same logic for this question. The product here is money/rupee.
The lending rate in the economy may remain high, in spite of RBI reducing the repo rate because, banks may be offering higher deposit rates to the public, which is basically the cost of money for banks.
When Government offers a higher interest rate on its savings schemes then banks are not willing to reduce their own deposit rate, as they fear that they will lose depositors. When banks don’t reduce the deposit rates, they do not reduce the lending rates.
If there is a liquidity crunch in the economy i.e. there is more demand for money than the supply then the suppliers of money i.e. banks may not reduce the lending rate (the price of money) in spite of RBI reducing the repo rate.
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Answer: (d)
The price of a product depends on its cost of production and its demand in the market both. If cost of production increases then the price of the product will increase and if cost of production does not increase but if demand increases then also price will increase because suppliers will sell at a higher rate. Apply the same logic for this question. The product here is money/rupee.
The lending rate in the economy may remain high, in spite of RBI reducing the repo rate because, banks may be offering higher deposit rates to the public, which is basically the cost of money for banks.
When Government offers a higher interest rate on its savings schemes then banks are not willing to reduce their own deposit rate, as they fear that they will lose depositors. When banks don’t reduce the deposit rates, they do not reduce the lending rates.
If there is a liquidity crunch in the economy i.e. there is more demand for money than the supply then the suppliers of money i.e. banks may not reduce the lending rate (the price of money) in spite of RBI reducing the repo rate.
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