CSEET · Economic and Business Environment · Key Government Institutions
Which of the following is the instrument through which the RBI lends short-term funds to commercial banks against government securities, and whose rate is the policy repo rate?
A repo operation is the instrument where the RBI lends short-term funds to banks against government securities with an agreement to repurchase them later, and the rate charged is the repo rate. Reverse repo absorbs liquidity instead, and CRR is only a reserve requirement.
- ARepo (repurchase) operationCorrect
- BReverse repo operation
- CCash reserve ratio
- DOpen market sale of securities outright
Explanation
Under a repo, the RBI provides liquidity to banks by buying government securities with an agreement to sell them back later; the rate charged is the repo rate. A reverse repo is the opposite, where the RBI absorbs liquidity from banks. CRR is a reserve requirement, not a lending instrument.
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