Question : The discount rate is the interest rate at which:
Option 1: Commercial banks borrow from the central bank
Option 2: Commercial banks lend to the central bank
Option 3: The government borrows from the central bank
Option 4: The central bank lends to the government
Correct Answer: Commercial banks borrow from the central bank
Solution : The correct answer is (a) Commercial banks borrow from the central bank.
The discount rate is the interest rate at which commercial banks can borrow funds directly from the central bank. It serves as a tool for the central bank to influence the liquidity and borrowing costs of commercial banks, thereby affecting the broader economy.
When commercial banks face a shortage of funds or need liquidity support, they can turn to the central bank for short-term loans at the discount rate. By adjusting the discount rate, the central bank can encourage or discourage banks from borrowing. Lowering the discount rate makes it more attractive for banks to borrow from the central bank, as it reduces their borrowing costs. This, in turn, increases the liquidity of the banking system and stimulates lending and economic activity. Conversely, raising the discount rate makes borrowing from the central bank more expensive and can act as a measure to reduce excessive borrowing and control inflationary pressures.
Question : The bank rate is the rate at which:
Option 1: RBI borrows from commercial banks
Option 2: RBI lends to commercial banks
Option 3: Commercial banks lend to customers
Option 4: Commercial banks borrow from RBI
Question : What is the term used to describe the rate at which a central bank lends money to commercial banks in a country?
Option 1: Interest rate
Option 2: Inflation rate
Option 3: Discount rate
Option 4: Exchange rate
Question : What is the meaning of reverse repo rate?
Option 1: The rate at which RBI borrows money from foreign banks.
Option 2: The rate at which RBI borrows money from commercial banks.
Option 3: The rate at which commercial banks borrow money from RBI.
Option 4: The rate at which commercial banks borrow money from foreign banks.
Question : The reverse repo rate is the rate at which Central Bank:
Option 1: Lends money to commercial banks short-term
Option 2: Lends money to commercial banks for long-term
Option 3: Accepts deposits from commercial banks
Option 4: None of these
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