Which among the following is correct about Reverse Repo Rate?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. When bank deposit it's excess money in RBI then RBI provides some interest to that bank. This interest is known as Reverse Repo Rate.
Reverse Repo Rate is one of the key tools used by the Reserve Bank of India (RBI) to control the money supply in the economy. It refers to the rate at which the RBI borrows money from commercial banks when they park their excess funds with the central bank. In return, the RBI pays interest to the banks, and this interest is termed the Reverse Repo Rate.
This mechanism helps the RBI absorb excess liquidity from the banking system, especially during times of inflation or when there is surplus money in the market. When the Reverse Repo Rate is increased, it encourages banks to deposit more money with the RBI to earn a safer return, thereby reducing the money flow into the economy.