Economics • Banking & FinanceMedium
What does the term 'Repo Rate' signify in the monetary policy operational framework administered by the Reserve Bank of India?
A. The interest rate at which the central bank lends short-term funds to commercial banks against eligible collateral securities✓ Correct Answer
B. The rate of return paid by commercial banks on long-term fixed deposit accounts held by senior citizens
C. The benchmark lending rate charged by commercial institutions to their prime corporate industrial borrowers
D. The dividend yield distributed annually by mutual fund houses to retail investors
💡 Solution & Explanation
The repo rate is the benchmark interest rate at which the Reserve Bank of India provides overnight or short-term liquidity to commercial banks against the collateral of government securities. An increase in this rate makes borrowing costlier for banks, which subsequently raises retail lending rates to curb inflationary pressures. The reverse repo rate represents the interest paid by the central bank for parking excess liquidity from commercial institutions.
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