Money and banking

Indian Economy (CDS)

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Indian Economy - Understanding the basics of Indian economic system

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With reference to the Liquidity Adjustment Facility (LAF), consider the following statements

Repo Rate is the interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities under the LAF.
Reverse Repo Rate is the interest rate at which the RBI absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

Select the correct statement.

1 only

2 only

Both

None

Explanation:

Repo Rate: It is the interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities under the LAF.
Reverse Repo Rate: The interest rate at which the RBI absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF. Basically, banks can park their money with RBI while receiving interest on it.

Hence both statements are correct.

By: Shubham Tiwari

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