CUET-UG Economics / Business Economics Test: Passage 4 — Flashcards

Read the following case study paragraphs carefully and answer the question based on the same.    

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the commercial banks for a short-term (a maximum of 90 days).    
When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks can't carry out their business at a profit whereas the very opposite happens when the repo rate is cut down.    
Generally, repo rates are cut down whenever the country needs to progress in banking and economy.<br>I. banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth ' 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at ' 1.07 billion (US$15 million) at the end of borrowing period. So the bank has paid ' 65 million (US$910,000) as interest. This is the reason it is called repo rate.