Economics • Banking & FinanceEasy
What does the term 'Repo Rate' signify in monetary policy?
A. The rate at which commercial banks borrow short-term funds from the central bank by selling eligible government securities with an agreement to repurchase them.✓ Correct Answer
B. The interest rate paid by commercial banks to retail depositors on savings accounts.
C. The rate at which the central bank borrows money from commercial banks without collateral.
D. The penalty rate charged for non-maintenance of Cash Reserve Ratio.
💡 Solution & Explanation
The repo rate is the benchmark policy interest rate at which the Reserve Bank of India extends short-term liquidity accommodations to scheduled commercial banks against eligible government securities. When the central bank tightens monetary policy to curb inflation, it typically raises the repo rate, making borrowing costlier for banks. Deposit rates and penalty charges for reserve shortfalls are governed through entirely different regulatory frameworks.
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