Explain how 'Repo Rate' can be helpful in controlling credit creation.
The rate of interest at which the RBI (Central Bank) gives short term loans to commercial banks is called Repo Rate.
The Central Bank makes use of Repo Rate to control the supply of money and credit creation. A rise in Repo Rate would make borrowings by commercial banks costly. This increase forces these banks to raise the interest rates on lending to the general public. As borrowings from banks become costly, it leads to a decline in demand for borrowings from the banks, which decreases credit creation in the economy. On the other hand, a fall in Repo Rate encourages banks to keep small proportion of their deposits as reserves since borrowing from the Central Bank is now less costly than before. This increases credit creation in the economy.