"Repo Rate and Bank Rate are two different measures, but a change in either of them may have the similar implication on the money supply in an economy." Defend or refute the given statement, giving valid explanation in support of your answer. "The Reserve Bank of India (RBI) is the sole authority for issuing currency notes in India, with an exception of Rs. 1 denomination that is issued by the Ministry of Finance." Do you agree with the given statement ? Explain the rationale behind the monopoly enjoyed by the Reserve Bank of India (RBI) on this front.

Question

Accepted Answer

I defend the statement. Repo Rate and Bank Rate have similar implications on money supply.

Justification:
1. Both are rates at which RBI lends to commercial banks
2. Repo Rate is for short-term lending
3. Bank Rate is for long-term lending
4. An increase in either raises cost of borrowing for banks
5. Banks raise their lending rates
6. Borrowing becomes expensive
7. Credit creation capacity reduces
8. Money supply decreases

Similarities:
1. Both affect cost of funds for banks
2. Both transmit to lending rates
3. Both control credit creation
4. Both regulate money supply

Differences:
1. Repo Rate is for short-term (overnight to 14 days)
2. Bank Rate is for long-term (no specific period)
3. Repo Rate involves repurchase agreement
4. Bank Rate is simple lending

Despite differences, both have similar impact on money supply.