Question

The rate at which the central bank lends money to commercial banks for immediate cash requirements is called

• A. Repo rate
• B. Reverse repo rate
• C. Cash reserve ratio (CRR)
• D. Statutory liquidity ratio (SLR)

Hint:

The repo rate is a key tool used by central banks to control liquidity in the economy by adjusting the cost of borrowing for commercial banks.

Answer 1

The Correct Option is A

Step 1: Understanding the Repo Rate:
The repo rate is the rate at which the central bank (e.g., the Reserve Bank of India) lends money to commercial banks to meet their short-term liquidity needs. This rate is one of the most important tools of monetary policy used by the central bank to control the money supply in the economy.
Step 2: Analyzing the Options:
- Option (A) Repo rate: This is the correct answer. The repo rate is the rate at which the central bank lends money to commercial banks for short-term needs.
- Option (B) Reverse repo rate: The reverse repo rate is the rate at which commercial banks lend money to the central bank. It is the opposite of the repo rate.
- Option (C) Cash reserve ratio (CRR): CRR is the percentage of a bank’s total deposits that it is required to keep with the central bank in cash. It is a tool for controlling money supply but not a lending rate.
- Option (D) Statutory liquidity ratio (SLR): SLR is the minimum percentage of a commercial bank’s net demand and time liabilities (NDTL) that it needs to maintain in the form of liquid assets. It is also a monetary policy tool, but not the one related to lending to commercial banks.
Step 3: Conclusion and Answer:
The correct answer is (A) because the repo rate is the rate at which commercial banks borrow money from the central bank for short-term liquidity needs.