Q. With reference to the tools of the Liquidity Management Framework (LMF) used by the Reserve Bank of India (RBI), consider the following statements:
1.The Reverse Repo Rate is the floor of the interest rate corridor, and any increase in this rate results in an expansionary monetary policy stance.
2.The Bank Rate is generally kept at the same level as the Marginal Standing Facility (MSF) rate and acts as the penal rate for non-collateralized long-term lending by the RBI.
3.The Repo Rate is the interest rate for banks’ overnight borrowing from the RBI against the collateral of Government securities.
Which of the statements given above are correct?
Answer: B
Notes:
Explanation:
Statement 1: Incorrect. The Reverse Repo Rate is the floor of the Liquidity Adjustment Facility (LAF) corridor. However, an increase in the Reverse Repo Rate incentivizes banks to park more funds with the RBI, thereby absorbing liquidity from the system, which is a contractionary monetary policy stance.
Statement 2: Correct. The Bank Rate is defined as the rate for long-term borrowings without collateral and typically coincides with the MSF rate, forming the ceiling of the LAF corridor. It serves as a penal rate.
Statement 3: Correct. The Repo Rate (Repurchase Rate) is the interest rate at which commercial banks borrow funds from the RBI on an overnight basis against the pledge of Government securities.
