RAS question
What is the Repo Rate?
Correct answer: (C) Rate at which RBI lends short-term funds to banks.
The repo rate is the rate at which banks borrow short-term funds from the Reserve Bank of India against eligible collateral, including government securities.
Explanation
The repo rate is not a general lending rate and not a permanent purchase of securities. In the RBI's own statistical guide, it is described as the rate at which banks borrow funds from the Reserve Bank against eligible collateral. The MCQ explanation narrows this to short-term money lent by RBI to commercial banks against government securities. That is why option C captures the core mechanism: liquidity flows from RBI to banks, with securities used as backing. The same RBI source also notes that the repo rate has been the single policy rate for signalling the monetary policy stance since June 2014, which explains why exams treat it as a key inflation-control instrument.
Why the other options are wrong
- (A) A permanent purchase of government securities is an open market operation, whereas the repo rate is tied to banks borrowing funds from RBI against collateral.
- (B) The rate at which banks lend to RBI describes the reverse repo side of the transaction, not the repo rate.
- (D) The repo rate is about RBI lending to banks against eligible collateral, not a special rate for lending to foreign banks.
Concept
This tests the monetary policy instruments section of Indian Economy, especially the direction of borrowing in repo and reverse repo transactions. It recurs in RAS because repo rate changes are a standard way to read RBI's policy stance and inflation-control approach.