Consider the following statements regarding the 'Reverse Repo Rate': 1. It is the rate at which the Central Bank borrows money from commercial banks. 2. It involves the purchase of securities by the Central Bank from commercial banks. 3. An increase in the Reverse Repo Rate discourages banks from parking their funds with the RBI. Which of the statements given above is/are correct?

The correct option is 1 only Explanation The Reverse Repo Rate is a quantitative monetary policy instrument used by the Reserve Bank of India (RBI) to manage liquidity in the economy. It represents the interest rate at which the central bank absorbs surplus liquidity from the banking system. Statement-wise Analysis: - Statement 1 is Correct: The Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. Banks park their excess funds with the RBI and earn interest at this rate. It is essentially the inverse of the Repo Rate. - Statement 2 is Incorrect: In a Reverse Repo transaction, the RBI absorbs liquidity (money) from the market. To secure these funds, the RBI sells government securities to commercial banks with an agreement to repurchase them in the future. The purchase of securities by the Central Bank occurs during a Repo transaction (to inject money) or Open Market Operations (OMO) purchases. - Statement 3 is Incorrect: An increase in the Reverse Repo Rate means banks earn higher interest on the funds they deposit with the RBI. Consequently, a higher rate encourages commercial banks to park their surplus funds with the RBI rather than lending it out in the market, thereby reducing the money supply. Key Takeaway: The Reverse Repo Rate is a tool for liquidity absorption. When the RBI wants to reduce liquidity, it raises the Reverse Repo Rate, incentivizing banks to park funds with the central bank in exchange for government securities (collateral).

Consider the following statements regarding the 'Reverse… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 5: Money and Banking

mcqhard

Consider the following statements regarding the 'Reverse Repo Rate':

It is the rate at which the Central Bank borrows money from commercial banks.
It involves the purchase of securities by the Central Bank from commercial banks.
An increase in the Reverse Repo Rate discourages banks from parking their funds with the RBI.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 8

Options

A1 and 3 only
B1 only
C1, 2 and 3
D2 only

Did you get this right?

Solution

The correct option is

1 only

Explanation

The Reverse Repo Rate is a quantitative monetary policy instrument used by the Reserve Bank of India (RBI) to manage liquidity in the economy. It represents the interest rate at which the central bank absorbs surplus liquidity from the banking system.

Statement-wise Analysis:

Statement 1 is Correct: The Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks. Banks park their excess funds with the RBI and earn interest at this rate. It is essentially the inverse of the Repo Rate.
Statement 2 is Incorrect: In a Reverse Repo transaction, the RBI absorbs liquidity (money) from the market. To secure these funds, the RBI sells government securities to commercial banks with an agreement to repurchase them in the future. The purchase of securities by the Central Bank occurs during a Repo transaction (to inject money) or Open Market Operations (OMO) purchases.
Statement 3 is Incorrect: An increase in the Reverse Repo Rate means banks earn higher interest on the funds they deposit with the RBI. Consequently, a higher rate encourages commercial banks to park their surplus funds with the RBI rather than lending it out in the market, thereby reducing the money supply.

Key Takeaway:

The Reverse Repo Rate is a tool for liquidity absorption. When the RBI wants to reduce liquidity, it raises the Reverse Repo Rate, incentivizing banks to park funds with the central bank in exchange for government securities (collateral).

Your note

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