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    Question

    In monetary policy operations, the Reverse Repo Rate

    refers to:
    A The rate at which RBI lends funds to commercial banks Correct Answer Incorrect Answer
    B The rate at which commercial banks lend money to RBI by parking their surplus funds Correct Answer Incorrect Answer
    C The rate paid by RBI on banks’ Cash Reserve Ratio (CRR) balances Correct Answer Incorrect Answer
    D The mandatory return earned by banks on Statutory Liquidity Ratio (SLR) investments Correct Answer Incorrect Answer
    E The penalty rate for banks borrowing beyond the Liquidity Adjustment Facility (LAF) window Correct Answer Incorrect Answer

    Solution

    • The Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows short-term funds from commercial banks. • It forms part of the Liquidity Adjustment Facility (LAF) and is typically used by RBI to absorb liquidity from the banking system. • When banks have excess funds, they park them with RBI and earn interest at the Reverse Repo Rate. • Conversely, the Repo Rate is the rate at which RBI lends to commercial banks. Thus, the correct description is that it is the rate at which banks park surplus funds with RBI.

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