Economics • Banking & FinanceEasy
What does the term 'Repo Rate' signify in the framework of monetary policy?
A. The rate at which commercial banks lend long-term funds to the central bank
B. The interest rate charged by the central bank when it lends short-term funds to commercial banks against eligible securities✓ Correct Answer
C. The rate of return offered on retail fixed deposits by scheduled banks
D. The interbank lending rate for overnight maturity
💡 Solution & Explanation
The repo rate is the policy interest rate at which the Reserve Bank of India lends short-term liquidity to commercial banks against government securities under the Liquidity Adjustment Facility. Unlike the bank rate, which applies to long-term rediscounting, the repo rate directly influences retail lending and deposit rates across the financial system. Central banks adjust this rate during monetary policy reviews to control inflation and stimulate economic growth. Interbank overnight borrowing occurs instead at the weighted average call money rate.
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