The rate at which central bank provides long term loans to commercial banks?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Bank Rate.
Commercial banks sometimes need to borrow from the central bank, which lends to them at different rates for different periods. For its longer-term loans to commercial banks, the rate the central bank charges is the bank rate.
Because these loans add to the banks’ reserves, the bank rate is also a tool of monetary policy: by raising it the RBI makes the loans dearer, the reserves of commercial banks fall and the money supply shrinks; a fall in the bank rate has the opposite effect.
Why the other options are incorrect
Option (2) Repo Rate. — Incorrect. The repo rate is the interest rate at which the central bank lends money by buying securities under an agreement to sell them back on a set date and price. These repo operations run for short maturities, such as overnight, 7 days or 14 days.
Option (3) Reverse repo rate. — Incorrect. Under a reverse repo the central bank sells securities with an agreement to buy them back, so it takes money out of the banks rather than lending to them.
Option (4) Marginal Standing facility. — Incorrect. The marginal standing facility is a window through which banks can borrow from the RBI overnight, against government securities, at a rate above the repo rate.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 07-06 S2 | 22-05 S1* 26-05 S2* 28-05 S1* | – | 28-05 S3* 31-05 S3* 08-06 S1* | – |
* A similar question.
NCERT (2025-26): “3.4 Policy Tools to Control Money Supply … However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14- day, etc. This type of operations have now become the main tool of monetary policy of the Reserve Bank of India.… …The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.” |