Question

What is the main purpose of the reverse repo rate in monetary policy?

Options

• Inject long-term funds into the banking system

• Absorb excess liquidity by encouraging banks to park funds with RBI

• Provide loans to the government for budget deficit

• Fix the minimum savings deposit rate in banks

Answer 1

Absorb excess liquidity by encouraging banks to park funds with RBI

Explanation: 

Reverse repo rate is the rate at which RBI borrows short-term funds from banks, so a higher reverse repo encourages banks to park excess funds with RBI, absorbing liquidity.