Question : The rate at which the RBI borrows from commercial banks is called:
Option 1: CRR
Option 2: SLR
Option 3: Repo rate
Option 4: Reverse repo rate
Correct Answer: Reverse repo rate
Solution : The correct answer is (d) Reverse repo rate.
The reverse repo rate is the rate at which the central bank (such as the Reserve Bank of India) borrows money from commercial banks. It is the opposite of the repo rate. While the repo rate is the rate at which the central bank lends money to commercial banks, the reverse repo rate is the rate at which the central bank borrows money from commercial banks.
The reverse repo rate is used by the central bank to absorb excess liquidity from the banking system. When the central bank increases the reverse repo rate, it incentivizes commercial banks to lend more funds to the central bank, as it offers them a higher interest rate on their surplus funds. This reduces the liquidity in the banking system and helps control inflationary pressures.
The reverse repo rate is an important tool for the central bank to regulate liquidity, manage interest rates, and influence the overall economic conditions.
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