Under which rate RBI lends money to commercial banks in event of any shortfall of funds?
Q. Which of the following is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds?- Published on 16 Feb 17
a. Benchmark Prime Lending Rate
b. Annual Percentage Rate
c. Bank Rate
d. Repo Rate
ANSWER: Repo Rate
Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term.
When the repo rate increases, borrowing from RBI becomes more expensive.
If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
Reverse Repo rate is the short-term borrowing rate at which RBI borrows money from banks.
The Reserve bank uses this tool when it feels there is too much money floating in the banking system.
An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI.
Thus, banks prefer to lend their money to RBI which is always safe instead of lending it others (people, companies etc.) which is always risky.
Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks.