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Which of the following definitions are correct?

  1. Basis points: increase in interest rates in percentage terms.

  2. Repo rate: the rate at which commercial banks borrow from the RBI by selling their securities or financial assets to the RBI for a long period of time.

  3. Reverse repo rate: rate of interest at which the central bank borrows funds from other banks for a short duration.

  4. Cash reserve ratio: minimum percentage of cash deposits that banks must keep with themselves to avoid liquidity issues.


 
Options:
A .  (ii), (iii) & (iv)
B .  (ii) & (iv)
C .  (i) & (ii)
D .  (iii) & (iv)
Answer: Option B
Answer: (b)
Basis points: It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bps), then it means that the interest rate has been increasing by 50%. One percentage point is broken down into 100 basis points. Therefore, an increase from 2% to 3% is an increase of one percentage point or 100 basis points.
Repo rate: Repo rate is the policy rate and is part of RBI’s Liquidity Adjustment Facility (LAF). It is the rate at which commercial banks borrow from the RBI by selling their securities or financial assets to the RBI for a short period of time. It comes with an agreement that the sold securities will be repurchased by the commercial banks from the RBI at a future date at a predetermined price. The repo rate is used by the central bank to increase liquidity in the system.
Reverse repo rate: Reverse Repo Rate is also a part of LAF. It is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it. This rate is used by the central bank to absorb liquidity from the economy. Generally, it is one per cent less than the Repo rate. Bank rate: The only way the bank rate is different from the repo rate is that the bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time. 
Cash reserve ratio: CRR is the minimum percentage of cash deposits that banks must keep with the central bank. The current rate is 4%, which means for a cash deposit of `100, the bank has to park 4 rupees, with the central bank.

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