Question

Which one of the following statement defines the term Reverse Repo Rate?
a) The Rate at which commercial banks borrow money from RBI
b) The Rate at which RBI borrowsfrom other banks
c) The Rate at which commercialbanks borrow from each other
d) None of these

Answer 1

Answer:

b) The Rate at which RBI borrowsfrom other banks

Explanation:

Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors.

Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank.

During high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers.