With reference to Repo rate consider the following statements 1 It is the rate at which the RBI borr...........

Economic Affairs Money Supply and Monetary Policy

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With reference to Repo rate, consider the following statements:

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

2. Both government securities and corporate bonds can be used for transactions under Repo rate.

Which of the statements given above is/are correct?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

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Explanation:

Statement 1 is incorrect. Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country.

Statement 2 is correct. The securities transacted here can be either government securities or corporate securities or any other securities which the Central bank permits for transaction. Non-sovereign securities are used in many global markets for repo operations. Unlike them, Indian repo market predominantly uses sovereign securities, though repo is allowed on corporate bonds and debentures.