What is the main purpose of the repo rate fixed by the Reserve Bank of India?
Question and options
What is the main purpose of the repo rate fixed by the Reserve Bank of India?
- Fix the interest rate on bank savings deposits
- Set the exchange rate of the rupee
- Regulate liquidity in the banking system
- Control fiscal deficit directly
Answer and explanation
Correct answer: C - Regulate liquidity in the banking system
The repo rate is the rate at which the RBI lends short-term funds to banks against government securities. Raising or lowering it tightens or eases liquidity and credit in the banking system, which is how monetary policy works. Savings deposit rates are set by each bank, the rupee's exchange rate is market-determined, and the fiscal deficit depends on government spending and revenue.
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