Interest Rate Adjustments

Lowering rates reduces borrowing costs, stimulating spending and investment.

Raising rates increases borrowing costs, helping control inflation.

Open Market Operations (OMOs)

Buying government securities injects money into the economy, promoting growth.

Selling government securities withdraws money, reducing inflation.

Quantitative Easing (QE)

Purchasing long-term securities to inject liquidity and lower long-term interest rates.

Repo Rates

Lowering the repo rate makes borrowing cheaper for banks, stimulating lending.

Raising the repo rate makes borrowing more expensive for banks, reducing lending.

Reverse Repo Rates

Lowering the reverse repo rate encourages lending by discouraging banks from parking funds with the central bank.

Raising the reverse repo rate reduces liquidity by encouraging banks to park funds with the central bank.

Potential Impacts on the Banking Sector

1. Profit Margins: Lower rates can squeeze net interest margins; higher rates can enhance them.
2. Lending Practices: Lower rates increase lending; higher rates reduce loan demand.
3. Credit Risk: Low rates may lead to higher credit risks; high rates increase default risk.
4. Liquidity Management: Changes in reserve requirements and repo rates directly affect banks’ liquidity.
5. Investment Decisions: Higher reverse repo rates can make holding securities more attractive.
6. Economic Stability: Effective monetary policy promotes economic stability, benefitting the banking sector.