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Reverse Repo Rate is a tool used by RBI to
Reverse Repo Rate is a tool used by RBI to
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Solution
The correct option is C absorb
If the RBI increases the reverse repo rate, it means that the RBI is willing to offer a lucrative interest rate to commercial banks to park their money with the RBI. This reduces the amount of money available for the bank’s customers. This naturally leads to a higher rate of interest which the banks will demand from their customers for lending money to them, thereby causing a reduction in liquidity.
If the RBI increases the reverse repo rate, it means that the RBI is willing to offer a lucrative interest rate to commercial banks to park their money with the RBI. This reduces the amount of money available for the bank’s customers. This naturally leads to a higher rate of interest which the banks will demand from their customers for lending money to them, thereby causing a reduction in liquidity.
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