What is repo rate?

Correct option is B

The correct answer is (b) It is the rate at which RBI buys government securities from banks

Explanation:

• Repo Rate (Repurchase Rate) is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for a short period to meet their liquidity requirements.
• In this transaction, commercial banks sell government securities (like Treasury Bills or Bonds) to the RBI with an agreement to repurchase them at a predetermined future date and price.
• From the RBI's perspective, this transaction involves buying government securities from banks, which injects money (liquidity) into the banking system.
• It is a key quantitative tool of the Monetary Policy used to regulate the money supply and control inflation.

Information Booster:

• Current Rate: As of December 2025, the Repo Rate is 5.25%.
• Monetary Policy Committee (MPC): The rate is determined by the six-member MPC, headed by the RBI Governor.
• Impact: A reduction in the Repo Rate (as seen recently) helps lower the cost of borrowing for banks, which typically leads to lower interest rates on loans (Home, Car, etc.) for customers.
• Liquidity Adjustment Facility (LAF): Repo and Reverse Repo operations are part of the RBI's LAF framework.

Additional Knowledge:

(a) It is the rate at which RBI sells government securities to the banks: This describes the Reverse Repo Rate mechanism. In this case, the RBI borrows money from banks by selling securities to absorb excess liquidity from the market.

(c) It is the rate at which RBI allows small loan in the market :This is incorrect. The RBI acts as a Banker's Bank and does not provide loans directly to the public or small borrowers.