Which one of the following is not correct about Repo rate?
- A.It is the interest rate charged by the Central Bank on overnight loan.
- B.It is the interest rate paid by the commercial banks on overnight borrowing.
- C.It is the interest rate agreed upon in the loan contract between a commercial bank and the Central Bank.
- D.It is the cost of collateral security.
Correct answer
Explanation
The correct answer is D, It is the cost of collateral security. The repo rate is an interest rate, not the cost of the collateral. Under a repo, short for repurchase agreement, a commercial bank sells government securities to the central bank and agrees to buy them back, usually the next day, at a slightly higher price. That difference is the interest, so the repo rate is what the central bank charges on overnight loans and what the commercial bank pays on overnight borrowing, at the rate fixed in the agreement. The securities serve only as collateral. In India the Monetary Policy Committee of the RBI sets the policy repo rate; raising it makes borrowing dearer and helps control inflation. Option A is not the answer because it correctly describes the rate from the central bank's side. Option B is not the answer because it is the same rate seen from the commercial bank's side. Option C is not the answer because the rate is indeed agreed upon in the repo contract between the two. Exam tip: under repo the RBI lends to banks against securities; under reverse repo banks park funds with the RBI.
Practice Questions
View allAmong the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?
- A.Spices
- B.Fresh fruits
- C.Pulses
- D.Vegetable oils
Show answer
Edible vegetable oils are India's largest agricultural import by value, and they have stayed at the top since well before this question was set.
Read the full explanation →'Broad-based Trade and Investment Agreement (BTIA)' is sometimes seen in the news in the context of negotiations held between India and
- A.European Union
- B.Gulf Cooperation Council
- C.Organization for Economic Cooperation and Development
- D.Shanghai Cooperation Organization
Show answer
The Broad-based Trade and Investment Agreement was the name given to the free trade agreement that India and the European Union began negotiating in 2007.
Read the full explanation →Consider the following statements : 1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries. 2. In terms of PPP dollars, India is the sixth largest economy in the world. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
Statement 1 is the definition of purchasing power parity, while statement 2 understates India's position. A PPP exchange rate is the rate at which the currency of one country would have to be converted into that of another to buy the same basket of goods and services in both.
Read the full explanation →What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'? 1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves. 3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below :
- A.1 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show answer
The main and certain advantage of GST is that it subsumes many indirect taxes into one and creates a common national market.
Read the full explanation →Which one of the following is not a strategy in the Rainfed Area Development (RAD) scheme of India?
- A.Diversified farming
- B.Soil health management
- C.Adaptation of cluster-based approaches
- D.Optimizing canal irrigation
Show answer
Rainfed Area Development is meant for farms that depend on rain, not on canals, so improving canal irrigation is not one of its strategies.
Read the full explanation →