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The rate at which the RBI lends money to commercial banks for the short term, against government securities, is called the:
Answer (Detailed Solution Below)View answer ▾Hide ▴
Answer: Option D — Repo rate
Detailed Solution
"Repo" is short for "repurchase option" or "repurchase agreement". The repo rate is the rate of interest at which the Reserve Bank of India lends money to commercial banks for the short term, usually overnight, against the collateral of government securities. The banks sell securities to the RBI with an agreement to buy them back (repurchase) at a predetermined price on a fixed date.
The repo rate is the RBI's main policy rate and its key tool for controlling inflation and influencing economic growth. It is decided by the six-member Monetary Policy Committee (MPC), headed by the RBI Governor.
When inflation is high, the RBI raises the repo rate. Borrowing becomes costlier for banks, which pass this on to customers through higher interest rates on loans. People and businesses borrow and spend less, and demand and inflation come down.
When growth is slow and inflation is low, the RBI cuts the repo rate. Loans become cheaper, encouraging borrowing, investment and spending.
In 2025, the MPC cut the repo rate several times, bringing it down to 5.5% by June 2025, as inflation eased.
Related terms:
Reverse repo rate: the rate at which the RBI borrows money from (absorbs liquidity from) commercial banks. Since 2022, the Standing Deposit Facility (SDF), at which the RBI accepts deposits without collateral, has replaced the reverse repo as the floor of the policy rate corridor.
Marginal Standing Facility (MSF): the rate at which banks can borrow overnight from the RBI in emergencies, above the repo rate, forming the ceiling of the corridor.
Bank rate: the rate at which the RBI lends to banks for the long term, without any agreement to repurchase; it is now aligned with the MSF rate.
Cash Reserve Ratio (CRR): the percentage of a bank's deposits that it must keep with the RBI as cash.
Statutory Liquidity Ratio (SLR): the percentage of deposits that banks must keep in liquid assets such as gold, cash and government securities.
Why not the other options?
- ✗The reverse repo rate is the rate at which the RBI borrows from banks.
- ✗The bank rate is the long-term lending rate without collateral repurchase.
- ✗The CRR is a reserve requirement, not a lending rate.
Quick tip
Remember: Repo = RBI lends to banks (short term, against securities), main policy rate set by the MPC; reverse repo/SDF = RBI absorbs money; MSF = emergency borrowing; CRR = cash with the RBI.
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Money, Banking & RBI — Preparation
This question tests your understanding of Money, Banking & RBI, a key topic in the General Knowledge section. The detailed solution above uses a step-by-step approach to show the reasoning, and where available, a shortcut that helps you solve similar questions in under 90 seconds during the actual exam.
This topic covers money and its functions, the banking system in India, the Reserve Bank of India and monetary policy, policy tools such as the repo rate, reverse repo rate, CRR and SLR, bank nationalisation, types of banks, and payment systems such as NEFT, RTGS and UPI. Banking exams test this topic in depth. Questions often ask when the RBI was set up (1935, on the recommendation of the Hilton Young Commission), when it was nationalised (1949), what each policy rate means, and when major banks were nationalised (14 banks in 1969 and 6 in 1980). Current policy rates change often, so check the latest RBI announcements. Practise the money, banking and RBI questions below, written in the style of the general awareness sections of exams such as SSC, banking, railways, CUET GAT, MAH CET and CLAT. Each question comes with a detailed explanation that adds related facts, so every question helps you revise more than one point.