Economics • Banking & FinanceMedium
What does the term 'Repo Rate' signify in the monetary policy framework of the Reserve Bank of India?
A. The interest rate charged by commercial banks on long-term corporate housing loans
B. The rate at which the central bank lends short-term funds to commercial banks against eligible securities✓ Correct Answer
C. The interest rate paid by commercial banks to retail depositors on savings accounts
D. The yield on government treasury bills traded in the secondary money market
💡 Solution & Explanation
Repo rate is the benchmark interest rate at which the Reserve Bank of India provides short-term liquidity to scheduled commercial banks against collateral such as government securities. An increase in the repo rate makes borrowing costlier for banks, leading to higher lending rates and reduced money supply in the economy. Conversely, a reduction in the repo rate lowers borrowing costs to stimulate economic activity. It forms the core operational instrument of the Monetary Policy Committee.
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