Repo rate is the rate at which RBI lends money to commercial banks; reverse repo rate is the rate at which RBI borrows from them. Which inference is correct under the source’s borrowing-cost model?
A repo-rate decrease raises borrowing cost and decreases bank lending
A repo-rate increase lowers borrowing cost and increases bank lending
A repo-rate increase lowers borrowing cost and decreases bank lending
A repo-rate decrease lowers borrowing cost and increases bank lending
Correct answer: (D) A repo-rate decrease lowers borrowing cost and increases bank lending
Explanation
Commercial banks pay the repo rate on funds borrowed from RBI. A lower repo rate therefore lowers this funding cost and, in the simple model intended by the question, encourages lending. Thus D. The other options associate a rate increase with lower cost or a decrease with higher cost.
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