How does the Reserve Bank of India (RBI) utilise the repo rate to control inflation?

Correct option is C

The correct answer is option (C) Increasing the repo rate and making borrowing more expensive for banks, thereby reducing the money supply in the economy

• The Reserve Bank of India (RBI) uses the repo rate as one of the primary tools in its monetary policy to control inflation and stabilize the economy.
• The repo rate is the interest rate at which commercial banks borrow short-term funds from the RBI.
  

Information Booster :-

• Decreasing the repo rate to increase the money supply, encouraging spending and investment : This is the opposite of controlling inflation. Lowering the repo rate makes borrowing cheaper, increasing the money supply and encouraging spending and investment, which can lead to higher inflation.
  
• ​Maintaining a constant repo rate regardless of inflation levels : This would be an ineffective strategy for controlling inflation. The RBI adjusts the repo rate depending on the inflationary pressures in the economy, so maintaining a constant rate wouldn't allow the RBI to respond to changing inflation trends.
• Increasing the repo rate to directly lower the prices of goods and services : While increasing the repo rate can help reduce inflation, it doesn’t directly lower the prices of goods and services. The effect of increasing the repo rate is more indirect: it slows down demand by making borrowing more expensive, which in turn reduces inflationary pressures.​