Which one of the following is not correct about Repo rate?
It is the interest rate charged by the Central Bank on overnight loan.
It is the interest rate paid by the commercial banks on overnight borrowing.
It is the interest rate agreed upon in the loan contract between a commercial bank and the Central Bank.
It is the cost of collateral security.
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-1 – 2020
– Option A is correct: It is the interest rate charged by the Central Bank (RBI) on loans (often overnight/short term).
– Option B is correct: From the perspective of commercial banks, it is the interest rate paid on their overnight borrowing from the RBI.
– Option C is correct: It is indeed the interest rate agreed upon in the repo transaction contract between the bank and the RBI.
– Option D is incorrect: Repo rate is an interest rate, not the cost of the collateral security itself. The collateral security (e.g., government bonds) is what is pledged by the bank to obtain the loan, and it has its own market value or cost, which is distinct from the interest charged on the loan amount.
– It stands for Repurchase Rate. In a repo transaction, banks sell securities to RBI with an agreement to repurchase them at a later date at a pre-determined price (which includes the interest component).
– The repo rate influences borrowing costs for banks and thereby affects liquidity in the financial system.