Question : ___________ is the rate at which the central bank borrows money from commercial banks.
Option 1: Repo rate
Option 2: Reverse repo rate
Option 3: Cash reserve ratio (CRR)
Option 4: Statutory liquidity ratio (SLR)
Correct Answer: Reverse repo rate
Solution : The correct answer is (b) Reverse repo rate.
The reverse repo rate is the rate at which the central bank borrows money from commercial banks. It is a monetary policy tool used by the central bank to manage liquidity in the banking system. When the central bank conducts a reverse repo operation, it offers to absorb excess liquidity from commercial banks by borrowing funds from them against the collateral of government securities. By raising the reverse repo rate, the central bank incentivizes commercial banks to lend money to the central bank, which reduces the liquidity in the banking system.
