Q. Consider the following statements:
1.The rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate.
2.In practice it is not called an interest rate but considered a discount on the dated government securities.
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: C
Notes:

Explanation: The rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate in India.

  • Basically, this is an abbreviated form of the ‘rate of repurchase’ and in western economies it is known as the ‘rate of discount’.
  • In practice it is not called an interest rate but considered a discount on the dated government securities, which are deposited by institution to borrow for the short term.
  • When they get their securities released from the RBI, the value of the securities is lost by the amount of the current repo rate.
  • The Call Money Market of India (inter-bank market) operates at this rate and banks use this route for overnight borrowings.

Source: Ramesh Singh

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