Economics • Banking & FinanceHard
Analyze the liquidity adjustment facility framework of the Reserve Bank of India. What is the operational distinction between the repo rate and the reverse repo rate?
A. Repo rate is the interest charged when banks borrow short-term funds from RBI, whereas reverse repo rate is paid by RBI when absorbing excess liquidity from banks✓ Correct Answer
B. Repo rate applies exclusively to long-term government bond auctions, whereas reverse repo rate governs foreign currency swap agreements
C. Repo rate is determined by the Ministry of Finance, whereas reverse repo rate is autonomously fixed by scheduled commercial banks
D. Repo rate represents the penalty interest charged for maintaining deficient cash reserve ratios, whereas reverse repo rate rewards excess statutory liquidity holdings
💡 Solution & Explanation
The repo rate is the interest rate at which the central bank lends short-term money to commercial banks against collateral, while the reverse repo rate is the interest rate paid by the central bank when it borrows funds from commercial banks by absorbing excess liquidity. These two rates form the corridor within which the weighted average call money rate operates. Adjusting this corridor allows the Monetary Policy Committee to signal its monetary stance. The liquidity adjustment facility operates on a daily basis to smooth out short-term fluctuations in interbank liquidity.
More Economics Banking & Finance questions
- Which institution acts as the central banking authority in India?
- What is the statutory objective of establishing the Monetary Policy Committee in India under the Reserve Bank…
- In the context of Indian banking regulations, what does the term 'Non-Performing Asset' signify for a…
- Analyze the structure and mandate of the Prompt Corrective Action (PCA) framework established by the Reserve…
- Which apex financial institution regulates commercial banks and cooperative banks operating within Arunachal…