Question

What is "Repo Rate"?

Hint:

Remember: Repo Rate is for when the RBI lends. Reverse Repo Rate is for when the RBI borrows from commercial banks.

Answer 1

Step 1: Understanding the Concept:
The question asks for the definition of Repo Rate, which is a key policy rate used by a country's central bank.

Step 2: Detailed Explanation:
The Repo Rate (Repurchase Rate) is the interest rate at which the central bank of a country (e.g., the Reserve Bank of India) lends money to commercial banks to meet their short-term funding needs.
This lending is done against the collateral of government securities. The name comes from the "Repurchase Agreement" where the commercial bank agrees to repurchase the same securities from the central bank at a predetermined future date and at a higher price (the difference in price represents the interest).
Purpose: The Repo Rate is a powerful tool of monetary policy used to control inflation and manage liquidity in the economy. \begin{itemize} \item An increase in the repo rate makes borrowing by commercial banks more expensive, which in turn leads to higher lending rates for the public, thus reducing the money supply and curbing inflation. \item A decrease in the repo rate makes borrowing cheaper, encouraging lending and boosting economic activity. \end{itemize}

Step 3: Final Answer:
The Repo Rate is the rate at which the central bank lends funds to commercial banks for their short-term requirements against the collateral of government securities.