The repo rate is the rate at which
- A.Commercial banks park their surplus funds with the Reserve Bank
- B.The Reserve Bank lends short term funds to commercial banks against government securities
- C.A bank lends to its most creditworthy customers
- D.The government borrows from the open market
Correct answer
Explanation
The correct answer is B. In a repurchase agreement a bank sells government securities to the Reserve Bank and agrees to buy them back the next day at a fixed price; the difference is the interest, and the rate is the repo rate. It is the policy rate announced by the Monetary Policy Committee, so a change in it moves the whole structure of short term interest rates.
Option A describes the reverse repo rate, under which banks lend their surplus to the central bank, and the standing deposit facility now performs the same absorbing role. Option C describes a lending rate to customers, such as the benchmark rate to which a bank links its loans, which is set by the bank and not by the Reserve Bank. Option D describes government borrowing through the sale of dated securities, which the Bank manages as debt manager but which is not the repo rate.
Read the full article: RBI and Monetary Policy: Functions, MPC and Credit Control
Practice Questions
View allThe Reserve Bank of India was established on the recommendation of which commission?
- A.The Hilton Young Commission
- B.The Chamberlain Commission
- C.The Fowler Committee
- D.The Narasimham Committee
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This body, formally the Royal Commission on Indian Currency and Finance, reported in 1926 and recommended the creation of a central bank separated from the government.
Read the full explanation →The Reserve Bank of India was nationalised with effect from
- A.1 April 1935
- B.1 January 1949
- C.15 August 1947
- D.19 July 1969
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The Bank began as a shareholders' institution, and the Reserve Bank (Transfer to Public Ownership) Act, 1948 transferred its shares to the central government with effect from the first day of 1949, since when it has been fully owned by the Government of India.
Read the full explanation →How many members does the Monetary Policy Committee of India have?
- A.Four
- B.Five
- C.Six
- D.Seven
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Three of them come from the Reserve Bank, the Governor as chairperson, the Deputy Governor in charge of monetary policy and an officer of the Bank nominated by the Central Board, and three are appointed by the central government from among persons of ability and integrity with knowledge of economics…
Read the full explanation →The Monetary Policy Committee was given statutory basis by amending the Reserve Bank of India Act through which law?
- A.The Finance Act, 2016
- B.The Banking Regulation Act, 1949
- C.The Fiscal Responsibility and Budget Management Act, 2003
- D.The Foreign Exchange Management Act, 1999
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It amended the Reserve Bank of India Act, 1934 to insert the provisions on the inflation target and on the Monetary Policy Committee, so that the policy rate is now set by a committee and not by the Governor alone, and the framework of flexible inflation targeting became law.
Read the full explanation →The cash reserve ratio that banks must maintain with the Reserve Bank is prescribed under
- A.Section 42 of the Reserve Bank of India Act, 1934
- B.Section 24 of the Banking Regulation Act, 1949
- C.Section 22 of the Reserve Bank of India Act, 1934
- D.The Foreign Exchange Management Act, 1999
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It requires every scheduled bank to keep with the Reserve Bank a cash balance calculated on its net demand and time liabilities, and this proportion is the cash reserve ratio.
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