Question

Reverse Repo Rate is a tool used by RBI to

• A. None of these
• B. To keep liquidity at one level
• C. Inject liquidity
• D. Absorb liquidity

Answer 1

The correct option is D

Absorb liquidity

The rate at which the RBI borrows from the commercial banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that the RBI is willing to offer lucrative interest rate to commercial banks to park their money with the RBI. This results in a reduction in the amount of money available for the bank’s customers as banks prefer to park their money with the RBI as it involves higher safety. This naturally leads to a higher rate of interest which the banks will demand from their customers for lending money to them, thereby causing reduction in liquidity.