Economics • Banking & FinanceMedium
Distinguish between the Repo Rate and the Reverse Repo Rate managed by the Reserve Bank of India. Which of the following statements is correct?
A. Repo rate is the interest charged when commercial banks borrow from RBI, whereas reverse repo rate is paid by RBI when it absorbs liquidity from banks✓ Correct Answer
B. Repo rate applies exclusively to foreign banks, while reverse repo rate applies to regional rural banks
C. Repo rate is fixed by the Central Government annually, whereas reverse repo rate floats daily based on stock market indices
D. Repo rate governs long-term capital investments, while reverse repo rate regulates short-term agricultural loans
💡 Solution & Explanation
The Repo Rate is the benchmark interest rate at which the Reserve Bank of India lends short-term funds to commercial banks against collateral securities. Conversely, the Reverse Repo Rate is the rate at which the central bank borrows funds from commercial banks or absorbs excess liquidity from the financial system. Both rates constitute core components of the Liquidity Adjustment Facility.
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