Economics • Banking & FinanceMedium
What is the primary distinction between the Repo Rate and the Reverse Repo Rate managed by the Reserve Bank of India?
A. Repo rate is charged on long-term loans, whereas reverse repo applies to overnight deposits
B. Repo rate is the rate at which banks borrow from the central bank, while reverse repo is the rate at which the central bank borrows from banks or absorbs liquidity✓ Correct Answer
C. Repo rate applies exclusively to cooperative banks, whereas reverse repo governs foreign banks
D. Repo rate is fixed by the Ministry of Finance, whereas reverse repo is determined by commercial banks
💡 Solution & Explanation
The repo rate is the interest charged by the Reserve Bank of India when commercial banks borrow short-term funds by pledging government securities. The reverse repo rate is the interest paid by the central bank when commercial banks park their excess liquidity with it. These rates form the lower and upper bounds of the liquidity adjustment facility corridor. Adjusting these rates signals the monetary policy stance to the broader financial markets.
More Economics Banking & Finance questions
- Examine the composition of money supply aggregates in India as defined by the Reserve Bank of India. Which…
- Examine the role of Self-Help Group (SHG) bank linkage programs, spearheaded by NABARD and implemented…
- What is the distinguishing feature of 'Payments Banks' operating in India compared to universal commercial…
- Which regional banking institution plays a pivotal role in providing short-term and medium-term refinance…
- What is the maximum permissible deposit limit allowed per customer in a single account for 'Payments Banks'…