Repo Rate is the rate at which:
(a) Commercial Banks purchase government securities from the central bank
(b) Commercial Banks can take loans from the central bank.
(c) Commercial Banks can keep their deposits with the Central Bank.
(d) Short-term loans are given by commercial banks.
Ans – (b)
The repo rate is the rate at which the central bank of a country (RBI in the case of India) lends money to commercial banks to meet their short-term needs.
The central bank advances loans against approved securities or eligible bills of exchange.
It is one of the tools of the central bank to regulate the money supply in the economy.
An increase in the repo rate increases the cost of borrowing from the central bank. It forces commercial banks to increase their lending rates, which discourages borrowers from taking loans.
It reduces the ability of commercial banks to create credit.
A decrease in the repo rate will have the opposite effect.