What is the primary operational purpose of the Repo Rate maintained by the Reserve Bank of India?

💡 Solution & Explanation

The repo rate is the interest rate at which the Reserve Bank of India lends short-term funds to scheduled commercial banks against government securities and other approved collateral. Adjusting this rate influences overall borrowing costs across the economy, serving as a primary instrument for managing liquidity and inflation. When the central bank raises the repo rate, borrowing becomes expensive, which dampens credit expansion and aggregate demand. The liquidity adjustment facility utilizes both the repo rate and the reverse repo rate to manage day-to-day interbank liquidity.