Reverse repo rate is the rate at which RBI borrows money from commercial banks, whereas repo rate is the rate at which Reserve Bank of India (RBI) lends to commercial banks. Which of the following statements can be inferred from the above passage?
Options:
(A) Decrease in repo rate will increase cost of borrowing and decrease lending by commercial banks.
(B) Increase in repo rate will decrease cost of borrowing and increase lending by commercial banks.
(C) Increase in repo rate will decrease cost of borrowing and decrease lending by commercial banks.
(D) Decrease in repo rate will decrease cost of borrowing and increase lending by commercial banks.
Official Answer Key:
D
Step-by-Step Solution & Explanation
### **Official Solution & Concept Analysis (GATE BT 2020 Q.6)**
**1. Governing Concept**:
- **Topic**: Macroeconomics & Monetary Policy Inference
- Definitions from text:
- **Repo rate**: The interest rate at which the central bank (RBI) lends money to commercial banks.
- Logical mechanism:
- If RBI **decreases the repo rate**, commercial banks borrow funds from RBI at a cheaper rate.
- This **decreases their cost of borrowing**, enabling banks to lower lending interest rates, thereby **increasing credit and lending** to businesses and consumers.
**2. Option Analysis**:
- **Option (A) is INCORRECT**: A decrease in repo rate reduces, not increases, borrowing cost.
- **Option (B) is INCORRECT**: An increase in repo rate increases borrowing costs.
- **Option (C) is INCORRECT**: An increase in repo rate increases borrowing costs.
- **Option (D) is CORRECT**: Formally matches monetary policy transmission: decreasing repo rate decreases borrowing costs and stimulates bank lending.
**3. Final Answer**:
- **Correct Choice**: **D**
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