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    Question

    The rate at which central bank provides loan to

    commercial banks is called?
    A Bank rate Correct Answer Incorrect Answer
    B Repo Rate Correct Answer Incorrect Answer
    C Reverse Repo rate Correct Answer Incorrect Answer
    D All of these Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    Bank rate −The rate at which central bank provides loan to commercial banks is called bank rate. This instrument is a key at the hands of RBI to control the money supply in long term lending. Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. Repo rate is always higher than the reverse repo rate. Reverse Repo Rate: It is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.

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