24Macroeconomics Question Bankinfluence the demand for and supply of overnight funds in the interbank market,ultimately affecting the cost and availability of credit in the economy.Based on the information provided in the prompt, it appears that the RBI hasdecided to increase the policy repo rate by 35 basis points to 6.25% in responseto elevated inflation and other macroeconomic factors. This suggests that theRBI's current policy stance is focused on tightening monetary conditions inorder to curb inflationary pressures. The decision to increase the repo rate mayalso be intended to support the value of the domestic currency and stabilizefinancial markets.b) Monetary policy transmission is the process by which the central bank'smonetary policy decisions affect the supply and demand for money in theeconomy, ultimately influencing economic activity and prices. In order tocontrol inflation, the central bank (in this case, the Reserve Bank of India orRBI) can use a variety of monetary policy tools to influence the cost andavailability of credit in the economy.One way the RBI can do this is by setting the policy interest rate, also known asthe repo rate. This is the rate at which the RBI lends money to commercialbanks. When the repo rate is increased, it becomes more expensive for banks toborrow money from the RBI, which in turn can lead to higher lending rates forconsumers and businesses. As a result, credit becomes less available anddemand for goods and services decreases, leading to lower price pressures. Onthe other hand, if the repo rate is decreased, it becomes cheaper for banks toborrow money, which can lead to lower lending rates and increased creditavailability, potentially resulting in higher demand and upward pressure onprices.The RBI can also use other tools to influence the supply and demand for creditin the economy, such as adjusting the amount of money banks are required tohold as reserves or using open market operations to buy or sell governmentsecurities. These tools can also affect the cost and availability of credit, andultimately have an impact on economic activity and prices.IS-LM, Monetary policy, fiscal policy
