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?
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