Question { UPSC, 200501 }

what is repo rate?

Answer

IT IS THE INTEREST RATE WHICH RBI CHARGES TO BANKS FOR
COLLATERALIZED SHORT TERM LOAN IS KNOWN AS THE REPO RATE.
DURING TIGHT LIQUITY CONDITIONS (AS IN 2008) WHEN BANKS
APPROACH RBI AND ASK FOR TEMPORARY LOAN. RBI GIVES LOAN
AFTER TAKING COLLATERAL I.E. G-SECS. THE INTEREST RATE WHICH
RBI CHARGES FOR SUCH SHORT TERM LOAN IS KNOWN AS REPO RATE.
AFTER THE SHORT TERM PERIOD IS OVER, BANKS HAVE THE
OBLIGATION TO REPAY THE MONEY BACK TO RBI, ALNG WITH
INTEREST AND 'BUYS BACK' THE G SECS, HENCE THE TERM
REPURCHASE AGREEMENT