Which of the following best describes the Reverse Repo Rate ........

Economics (CUET) Money and banking

The Reserve Bank of India (RBI) plays a pivotal role in controlling the money supply and ensuring the stability of the Indian economy. During a period of high inflation, the RBI may adopt a contractionary monetary policy to curb excess money circulation. This is done by increasing key policy rates like the Repo Rate and Reverse Repo Rate, which directly influence commercial banks' borrowing and lending capabilities.

When the Cash Reserve Ratio (CRR) is raised, banks are required to hold a higher proportion of their deposits with the RBI, thereby reducing the amount of money available for loans. Conversely, in times of economic slowdown, the RBI may lower these rates to encourage borrowing and spending. The Open Market Operations (OMO) is another tool used by the RBI where it buys or sells government securities in the open market to manage liquidity.

Which of the following best describes the Reverse Repo Rate?

The rate at which the RBI borrows from commercial banks

The rate at which commercial banks borrow from the RBI

A mandatory reserve kept by commercial banks

The rate charged by banks on customer loans

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Explanation:

The Reverse Repo Rate is the rate at which the RBI borrows funds from commercial banks. When the RBI increases this rate, it encourages banks to park excess funds with the central bank, reducing the money supply in the economy and controlling inflation.