The repo rate is the rate of interest at which
- A.Commercial banks lend to their prime customers
- B.The Reserve Bank lends short-term funds to banks against government securities
- C.The Reserve Bank borrows surplus funds from commercial banks
- D.Banks pay interest on savings deposits
Correct answer
Explanation
The correct answer is B, the Reserve Bank lends short-term funds to banks against government securities. In a repurchase or repo transaction a bank sells government paper to the Reserve Bank and agrees to buy it back shortly afterwards at a slightly higher price; the difference works out as interest at the repo rate. It is the main operating instrument of monetary policy, and a rise in it makes borrowing costlier for banks and so for their customers.
Option A describes the lending rate charged to customers, which banks fix themselves under a benchmark framework laid down by the Reserve Bank. Option C describes the reverse repo rate, the rate at which the Reserve Bank absorbs surplus funds from banks, which is always below the repo rate. Option D is the savings deposit rate, which banks are free to decide. Keep repo and reverse repo the right way round by remembering that in a repo the Reserve Bank gives money and in a reverse repo it takes money.
Read the full article: Money and Banking in India: RBI, Supply and Policy
Practice Questions
View allThe Reserve Bank of India began its operations on which date?
- A.1 April 1935
- B.1 January 1949
- C.1 July 1955
- D.19 July 1969
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The Reserve Bank of India was constituted under the Reserve Bank of India Act of 1934, on the recommendation of the Hilton Young Commission, and started functioning on 1 April 1935 with its central office at Calcutta, which was shifted permanently to Bombay in 1937.
Read the full explanation →In the measurement of money supply in India, which aggregate is known as broad money?
- A.M0
- B.M1
- C.M3
- D.M4
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M3 is M1 plus time deposits with banks, and it is called broad money or the aggregate monetary resource. It is the measure the Reserve Bank follows most closely because it captures both spendable balances and funds held for a fixed term.
Read the full explanation →How many commercial banks were nationalised in India in the first round of bank nationalisation in July 1969?
- A.Six
- B.Twelve
- C.Fourteen
- D.Twenty
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On 19 July 1969 the government nationalised fourteen of the largest commercial banks in the country, the aim being to take banking to rural areas, direct credit to agriculture and small industry, and end the concentration of bank funds in a few business houses.
Read the full explanation →In India, the one rupee note is issued by
- A.The Reserve Bank of India
- B.The State Bank of India
- C.The Government of India
- D.The Security Printing and Minting Corporation
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The one rupee note and all coins are issued by the Government of India through the Ministry of Finance, and the one rupee note carries the signature of the Finance Secretary rather than that of the Governor of the Reserve Bank.
Read the full explanation →The Reserve Bank of India was nationalised in which year?
- A.1935
- B.1949
- C.1955
- D.1969
Show answer
The Reserve Bank began in 1935 as a shareholders' bank with privately held capital.
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