Q. Consider the following statements:
1.Repo and Reverse Repo introduced in 1992 for raising short term funds.
2.All government securities are dated and the interests for the repo or reverse repo transactions are announced by the finance ministry from time to time.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: D
Notes:

Explanation: In the era of economic reforms there developed two new instruments of money market—repo and reverse repo.

  • Considered the most dynamic instruments of the Indian money market they have emerged the most favoured route to raise short-term funds in India.
  • ‘Repo’ is basically an acronym of the rate of repurchase. The RBI in a span of four years, introduced these instruments—repo in December 1992 and reverse repo in November 1996.
  • Repo allows the banks and other financial institutions to borrow money from the RBI for short-term (by selling government securities to the RBI).
  • In reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions).
  • All government securities are dated and the interests for the repo or reverse repo transactions are announced by the RBI from time to time.

Source: TMH Ramesh Singh