Question

The rate at which commercial banks borrow loans from the Reserve Bank of India to meet their long-term requirements is known as

• A. Margin requirement
• B. Bank rate
• C. Repo rate
• D. Reverse repo rate

Hint:

Remember the key distinction for RBI lending rates: Repo Rate is for short-term needs (Repurchase Option), while Bank Rate is for long-term needs.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The question asks to identify the specific policy rate used by the RBI for long-term lending to commercial banks.

Step 2: Detailed Explanation:
Let's define the given rates: \begin{itemize} \item Repo Rate: The rate at which the RBI lends money to commercial banks for their short-term needs, against the security of government bonds. \item Bank Rate: The rate at which the RBI lends money to commercial banks for their long-term needs, without any collateral. It is also the rate at which the RBI rediscounts bills of exchange. \item Reverse Repo Rate: The rate at which the RBI borrows money from commercial banks. \item Margin Requirement: This is a qualitative tool of credit control, not an interest rate. It refers to the difference between the market value of a security and the loan amount granted against it. \end{itemize} The question specifically mentions "long-term requirements," which directly corresponds to the definition of the Bank Rate.

Step 3: Final Answer:
The rate for long-term borrowing by commercial banks from the RBI is the Bank Rate. Therefore, option (B) is correct.