Question

Match List-I with List-II:

List-I		List-II
A	Bank Rate	(I)	Securities are pledged in order to repurchase
B	Marginal Standing Facility	(II)	Minimum rate at which funds are provided for long term
C	Repo Rate	(III)	Also known as Penal Interest Rate
D	Reverse Repo Rate	(IV)	Central Bank borrows funds from commercial banks

• (A) - (I), (B) - (II), (C) - (III), (D) - (IV)
• (A) - (II), (B) - (III), (C) - (I), (D) - (IV)
• (A) - (I), (B) - (II), (C) - (IV), (D) - (III)
• (A) - (III), (B) - (IV), (C) - (I), (D) - (II)

Answer 1

The Correct Option is D

To solve the problem of matching List-I with List-II, we need to understand the definitions and concepts associated with each term in List-I: 

1. Bank Rate: This is often known as the Penal Interest Rate. The bank rate is the rate charged by a nation's central bank for lending funds to domestic banks. The correct match is from List-II (III) Also known as Penal Interest Rate.
2. Marginal Standing Facility (MSF): This facility allows commercial banks to borrow money from the central bank overnight when inter-bank liquidity completely dries up. The central bank borrows funds from commercial banks in this situation. The correct match is from List-II (IV) Central Bank borrows funds from commercial banks.
3. Repo Rate: The rate used when securities are pledged with the central bank to repurchase them at a future date is the repo rate. It is generally used as a tool for short-term borrowing and managing liquidity. The correct match is from List-II (I) Securities are pledged in order to repurchase.
4. Reverse Repo Rate: This is the rate at which the central bank borrows money from commercial banks over a short period. It is generally used to manage excess liquidity in the banking system. The correct match is from List-II (II) Minimum rate at which funds are provided for long term.

Thus, the correct answer is: (A) - (III), (B) - (IV), (C) - (I), (D) - (II)

Answer 2

The Bank Rate is the penal interest rate at which the central bank lends to commercial banks. It is typically set higher than the standard interest rates to discourage banks from borrowing excessively. The bank rate serves as a tool for the central bank to regulate the money supply and control inflation. When commercial banks borrow at this rate, it is often seen as a last resort, and the cost of borrowing is higher.

The Repo Rate (Repurchase Rate) is the rate at which commercial banks borrow money from the central bank by providing securities as collateral. In this arrangement, commercial banks agree to repurchase the securities at a future date, usually in the short term. The Repo Rate is a key tool used by central banks to manage liquidity in the banking system and to influence interest rates in the economy.

On the other hand, the Reverse Repo Rate is the rate at which central banks borrow funds from commercial banks, typically for short-term periods, by offering securities. In this case, commercial banks lend money to the central bank, which helps manage the liquidity in the banking system and control inflationary pressures. When the central bank raises the reverse repo rate, it encourages commercial banks to park more of their excess reserves with the central bank, thereby reducing the money supply in the market.

Together, the Bank Rate, Repo Rate, and Reverse Repo Rate are critical tools for the central bank to control monetary policy, manage liquidity, and stabilize the economy.