Repo rate is the interest rate at which the Reserve Bank of India (RBI) lends to commercial banks, while reverse repo rate is the rate at which RBI borrows from them.​

Passage Analysis

The passage states that repo rate is for RBI lending to (borrowing from) commercial banks, confirming RBI lends at repo rate and banks lend to RBI at reverse repo rate. This aligns with standard RBI policy definitions.​

Option Breakdown

• (a) Incorrect: A decrease in repo rate lowers RBI’s lending rate to banks, reducing banks’ borrowing costs, which decreases their lending rates and encourages more lending, not less.​

• (b) Incorrect: An increase in repo rate raises banks’ borrowing costs from RBI, increasing their lending rates and typically reducing lending volume.​

• (c) Incorrect: An increase in repo rate raises borrowing costs and reduces lending, but the option wrongly states it decreases cost of borrowing.​

• (d) Correct: A decrease in repo rate reduces banks’ cost of funds from RBI, allowing lower lending rates to customers and boosting lending activity.​

Repo rate decrease directly lowers the cost of borrowing for commercial banks from RBI, enabling reduced lending rates and increased lending to spur economic growth.​

Repo Rate Fundamentals

Repo rate serves as RBI’s key tool for liquidity control: lower rates inject money into the system by making funds cheaper for banks. Reverse repo rate, conversely, absorbs excess liquidity when RBI borrows from banks.​

Effects of Repo Rate Decrease

• Banks borrow at lower rates from RBI, passing savings to customers via cheaper loans.​

• Reduced borrowing cost stimulates demand for credit, home loans, and business financing.​

• Overall lending by commercial banks rises, supporting consumption and investment.​

Inference Question Solved

In competitive exams, options test inverse relationships: repo rate drop means lower costs and higher lending, making (d) the valid inference. Other options reverse this logic, failing passage alignment.​