Economics • Banking & FinanceEasy
What is the primary role of a 'Repo Rate' adjusted by the Reserve Bank of India during monetary policy reviews?
A. The rate at which commercial banks borrow short-term funds from the RBI by selling securities✓ Correct Answer
B. The interest rate paid by commercial banks on long-term government bonds
C. The rate at which RBI absorbs surplus liquidity from banks without collateral
D. The minimum interest rate charged by banks to their prime corporate borrowers
💡 Solution & Explanation
The repo rate is the benchmark interest rate at which the Reserve Bank of India extends short-term liquidity accommodations to commercial banks against eligible government securities. This contrasts with the reverse repo rate, which governs how the central bank absorbs excess liquidity from the banking system. Adjustments to the repo rate serve as a primary monetary policy instrument used by the central bank to manage inflationary pressures in the economy.
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