|Consider the following:|
|1. Reverse repo rate is the rate at which RB I re-discounts bills and other permitted securities|
|2. Increase in reverse repo rate will increase the cost of borrowing of the government but it will also increases better returns to the banks if they park their funds with the RBI. Which of these statements is/are correct?|
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :[c] Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country. An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
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