Statement 1: Decrease in Repo Rate and Reverse Repo Rate enhances the credit creating power of Commercial bank.
Statement 2: Repo Rate and Reverse Repo Rate are treated in the same way in controlling lending capacity of Commercial Banks.
(a) Both the Statements are true
(b) Both the Statements are false
(c) Statement 1 is true and Statement 2 is false
(d) Statement 2 is true and Statement 1 is false
Ans – (a)
Statement 1 is correct as a decrease in repo rate and reverse repo rate enhances the credit-creating power of commercial bank.
Repo Rate: Repo rate is the rate at which the central bank of a country lends money to commercial banks to meet their short-term needs.
A decrease in the repo rate decreases the cost of borrowing from the central bank. if forces commercial banks to decrease their lending rates, which encourages borrowers to take loans. It increases the ability of commercial banks to create credit.
Reverse Repo Rate: Reverse Repo Rate is the rate of interest at which commercial banks can deposit their surplus funds with the central bank for a relatively shorter period of time.
In other words, it is the rate of interest at which the central bank accepts deposits from commercial banks.
Lowering the reverse repo rate discourages commercial banks from depositing their funds with the central bank.
It encourages the commercial banks to lend money to the general public.
It enhances the credit-creating power of commercial banks.
Statement 2 is also correct, a decrease in repo rate and reverse repo rate increases the credit creation.
On the other hand, an increase in repo rate and reverse repo rate decreases the credit creation.