Consider the following statements 1 Repo rate is the rate at which RBI borrows ...........

Economic Affairs Money Supply and Monetary Policy

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Consider the following statements.

1. Repo rate is the rate at which RBI borrows from commercial banks.

2. Reverse Repo rate is the rate at which commercial banks borrow from RBI.

3. Reverse Repo rate is always higher than repo rate.

Select the correct statement from the following codes:

1 and 2 only

1 and 3 only

1 only

NONE of the above

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Explanation:

All the statements are incorrect.

Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.

Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.

As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy.