Consider the following statements regarding Repo Rate amp Reverse Repo Rate 1 Repo rate applies only...........

Economic Affairs Money Supply and Monetary Policy

Consider the following statements regarding Repo Rate & Reverse Repo Rate?

1. Repo rate applies only to borrowings of banking institutions, whereas reverse repo is used for the financial deposits and borrowings of all financial institutions in Indian registered with RBI.

2. An increase in repo rate has the opposite effect on primary liquidity in the economy as an increase in reverse repo rate.

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

Statement 1: Repo Rate is the rate at which RBI lends money to commercial banks against the pledge of government securities whenever the banks are in need of funds to meet their day-to-day obligations.Reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods. When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds. Both repo and reverse repo apply to banking institutions.

Statement 2: So, higher the repo rate higher the cost of short-term money and vice versa and thus lower the borrowing. Hence, liquidity is lower in the economy. Similarly, if the reverse repo rate increases banks park more funds with the RBI and lesser liquidity is available with the economy. So, an increase in both would have similar effects on primary liquidity