MONETARY POLICY

Q. 2017 JAN III
Which among the following rates is independently determined in India?
A) Repo rate
B) Reverse repo rate
C) Both (1) and (2)
D) Neither (1) nor (2)
ANS: (A) REPO (REPURCHASE) RATE
• It is the rate at banks borrows funds from RBI to meet the demand-supply gap.
• This is the only one independently varying rate among the monetary policy instruments.
• The difference between repo rate and bank rate is that, in repo rate, there is a sale of a security to RBI on the agreement to repurchase at a future date at a predetermined price. In bank rate, there is no such sale or repurchase but lending money at a predetermined rate.
• The repo rate is increased to reduce the credit-creating capacity of banks.