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Question 4) On May 22, 2022, the RBI increased the policy repo rate by 40 bps (100 bps = 1 per cent), from 4.0 per
Question 4) On May 22, 2022, the RBI increased the policy repo rate by 40 bps (100 bps = 1 per cent), from 4.0 per cent to 4.4 per cent. The Marginal Standing Facility (MSF) rate was increased to 4.65 per cent and reverse repo rate to 4 per cent. i) Explain why the inter-bank interest rate (the call money rate) typically stays inside the above corridor of policy rates, i.e. the call money rate does not go beyond the MSF rate and does not fall below the reverse repo rate. (4 marks) ii) Briefly discuss why RBI is increasing the repo rate it is following an accommodation stance in monetary policy. What are the other criteria's which RBI takes into consideration while deciding to increase the repo rate effectively pulling aggregate demand, while remaining in an accommodati stance (6 marks)
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