- Statement 1 correctly defines the repo rate as the rate at which the RBI lends money to commercial banks for short periods. - Statement 2 correctly defines the reverse repo rate as the rate at which the RBI borrows money from commercial banks for short periods, effectively paying interest on their short-term deposits with the RBI. - Statement 3 claims that the gap between the repo rate and the reverse repo rate has been declining in India in the recent past. The Reserve Bank of India (RBI) manages a policy corridor defined by the Marginal Standing Facility (MSF) rate as the ceiling, the policy repo rate in the middle, and the Standing Deposit Facility (SDF) rate (or the operational reverse repo rate before SDF became the floor) as the floor. While the absolute rates change, the gap or width of this corridor (e.g., the difference between the repo rate and the floor rate) is determined by RBI policy and is often kept constant for extended periods (e.g., 25 bps difference between repo and SDF/RRR). Changes to this gap are specific policy decisions, not a continuous decline. Therefore, claiming a continuous decline in the gap "in the recent past" is generally incorrect or not a consistent trend.
Consider the following statements: 1. Repo rate is the interest rate at which RBI lends to commercial banks for short period. 2. Reverse repo rate is the interest rate which RBI pays to commercial banks on short-term deposits. 3. Gap between repo rate and reverse repo rate has been declining in India in the recent past. Which of the statements given above is/are not correct?
Asked in UPSC CAPF 2013 · Topic: Money & Banking (Monetary Policy: Objectives, Instruments (quantitative and qualitative), and Transmission Mechanism)
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