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CA Foundation · Business Economics · Money Market

The Reserve Bank of India uses reverse repo operations primarily to achieve which objective?

Reverse repo operations allow the RBI to absorb excess liquidity from the banking system by borrowing funds and offering government securities as collateral. This tightens monetary conditions and is used to control inflation or reduce money supply when it is excessive.

  1. AIncrease money supply in the banking system
  2. BAbsorb excess liquidity from commercial banksCorrect
  3. CReduce the policy interest rate to stimulate borrowing
  4. DEncourage retail investors to invest in government securities

Explanation

In a reverse repo operation, the RBI borrows funds from commercial banks and offers them government securities as collateral, promising to repurchase them at a higher rate. This withdraws liquidity from the system and tightens monetary conditions. A regular repo operation increases liquidity, while reverse repo decreases it. Option 1 is correct because reverse repo absorbs excess liquidity—the opposite of what happens in a regular repo. Option 2 is the typical distractor confusing repo and reverse repo operations.

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