Q. Consider the following statements regarding the monetary policy tools used by the Reserve Bank of India (RBI):
1.Repo rate refers to the interest rate at which the RBI lends short-term funds to commercial banks against government securities.
2.Reverse repo rate is the rate at which the RBI borrows short-term funds from banks and financial institutions.
3.A higher repo rate encourages banks to lend more to the public to earn higher interest income.
Which of the statements given above is/are correct?
Answer: A
Notes:
Explanation:
- Repo rate is the rate at which the RBI lends short-term funds to banks by accepting dated government securities as collateral.
- Reverse repo rate is the rate at which banks lend short-term surplus funds to the RBI, essentially the reverse of repo.
- A higher repo rate makes borrowing from RBI costlier for banks, reducing their ability to lend, and hence discourages lending, not encourages it.
Source: Indian Economy (Ramesh Singh)
