Question : Statement 1: Repo rate is the rate at which the central bank lends money to commercial banks.
Statement 2: Reverse repo rate is the rate at which banks borrow money from each other.
Option 1: Statement 1 is true, and statement 2 is true.
Option 2: Statement 1 is true, but statement 2 is false.
Option 3: Statement 1 is false, and statement 2 is true.
Option 4: Statement 1 is false, and statement 2 is false.
Correct Answer:
Statement 1 is true, and statement 2 is true.
Solution : The correct answer is (a) Statement 1 is true, and statement 2 is true.
Statement 1 is true. The repo rate is the interest rate at which the central bank (like the Reserve Bank of India in India) lends short-term funds to commercial banks against government securities. It is a tool used by the central bank to control money supply and manage liquidity in the economy.
Statement 2 is also true. The reverse repo rate is the rate at which commercial banks lend money to the central bank. It's the opposite of the repo rate. When banks have excess funds, they can park these funds with the central bank and earn interest at the reverse repo rate. Additionally, banks can borrow from each other in the money market at various interest rates, including the call money rate, but it's not referred to as the "reverse repo rate."
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