Repo rate is the rate at which RBI lends to its clients generally against government securities. The increase in the repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.
Banks earn their income by supplying loans to businesses out of deposits made by people and earn interest income out of such loans.
When there is an increase in borrowing rates from RBI,the banks have no option but to increase interest rates charged from businesses in order to set off increased cost of borrowed capital.
So whenever repo and bank rates increase, the cost of borrowing for business houses too increases and hence incentive to further investment decreases.
Such decrease in investment is primarily advocated in inflationary periods to curtail further aggregate demand in the economy, which will push prices further up.
Such increase in rates therefore, lead to less loans,hence less credit creation.
