Question : The rate at which banks borrow from the RBI under the liquidity adjustment facility (LAF) is called:
Option 1: Bank rate
Option 2: Marginal Standing Facility (MSF) rate
Option 3: Reverse Repo Rate
Option 4: Repo Rate
Correct Answer: Repo Rate
Solution : The correct answer is (d) Repo Rate.
The Repo Rate is the rate at which banks borrow funds from the Reserve Bank of India (RBI) under the liquidity adjustment facility. It is a tool used by the RBI to inject liquidity into the banking system or absorb excess liquidity. When banks need short-term funds, they can borrow from the RBI by selling government securities with an agreement to repurchase them at a later date. The Repo Rate determines the cost of borrowing for banks, and changes in the Repo Rate affect the overall liquidity in the market.
