Money and Banking (part – II)

'Repurchase Option' (or Repo Rate) is used by the Reserve Bank of India (RBI) to regulate the money supply and inflation in the economy. Hence, option (d) is the correct answer.

Repo Rate is the Rate at which the RBI lens money to commercial banks in the event of any shortfall of funds in the short term It is the (fixed) interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF). Repo Rate is used by the RBI to control inflation.

Repo Rate is the Rate at which the RBI lens money to commercial banks in the event of any shortfall of funds in the short term It is the (fixed) interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF). Repo Rate is used by the RBI to control inflation.

Reverse Repo Rate is the interest rate at which Central Bank (RBI) borrows money from commercial banks for a short term. Through this, the RBI absorbs surplus money from banks against the collateral of eligible government securities on an overnight basis.

Repo (Re-purchase Option) Rate is the rate at which RBI lends to commercial banks and Reverse Repo Rate is the rate at which RBI borrows from commercial banks. In case of inflationary tendencies, RBI can hike the Reverse Repo Rate and absorb the excess liquidity in the market. Similarly, in case there is perceived need to inject liquidity into the system, RBI can reduce the Repo Rate, which will lead to a re- lease of money into the market. RBI occasionally resorts to the Repo route to fine-tune the liquidity position, without resorting to major policy instruments such as change in CRR and Bank Rate. However, markets are bound to react to frequent changes in the Repo rates and this will be reflected in corresponding changes in the deposit and lending rates of commercial banks. Hence, statement 1 is correct. A value of 1 for Gini Coefficient in a country implies that there is perfectly unequal income for everyone. Value of 0 for Gini Coefficient shows perfectly equal income. Hence, statement 2 is incorrect.

Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. In general terms, a bank rate is the interest rate at which nation's Central Bank (RBI) lends money to commercial banks for long term financial requirements . Hence, statement (1) is incorrect. Under Repo Rate, RBI lends money to commercial banks for a short term. Hence, statement (2) is also incorrect. Thus, the option (c) is the correct answer.

The demand side is important in CPI based inflation. There is a inverse relationship between all four given instruments of monetary policy and inflation. Hence, increase in Repo Rate and SLR ratio will reduce inflation, while decrease in Reverse Repo Rate and Bank Rate will increase the rate of inflation. Therefore, option (a) and (b) both are correct. As per Rajasthan Public Service Commission, option (d) is correct, which is not the right answer.

Bank Rate is the rate which the RBI extends credit to commercial banks. The money that commercial banks repay to RBI is the interest amount on the loans. An increase in Bank Rate means hike in commercial banks' borrowing cost , which reduces the supply of money in the market. It means the Central Bank is following a tight (contractionary) money policy. Hence, option (d) is correct.

Bank Rate is the rate at which the RBI lends to the commercial banks. So, when this rate is reduced, banks borrow more and lend more to retail loan seekers and, thus infuse more liquidity in the market.

Bank Rate implies the rate of interest at which the RBI discount the Bills of Exchange. In other words, it is the rate of interest at which RBI provides loans to the commercial banks. It is an instrument of monetary policy to influence money supply in the economy.