Q. Consider the following statements:
1.In a repo transaction, gold reserves serve as collateral for the short-term loans.
2.A reduction in the repo rate by the Reserve Bank of India (RBI) would lower borrowing costs for banks.
Which of the statement(s) given above is/are correct?
Answer: B
Notes:
Explanations –
Statement 1 is incorrect. In a repo (repurchase) transaction, government securities, are typically used as collateral. Banks borrow funds from the Reserve Bank of India (RBI) by pledging these government securities and agreeing to repurchase them later.
Statement 2 is correct. The repo rate is the interest rate at which the RBI lends money to commercial banks. A reduction in the repo rate lowers borrowing costs for banks, enabling them to access cheaper funds, which can also lead to lower interest rates for consumers and businesses.
Source: AIR
