UPSC Prelims / Economy

Monetary policy sample question

Read the question, answer, option analysis and revision tip before taking a timed mock.

By Sarkari Engine Editorial DeskLast updated 6 August 2026Method, answer logic and revision steps reviewed

Question

Repo rate refers to the rate at which:

  1. A. Banks lend to customers
  2. B. RBI lends to commercial banks
  3. C. Customers lend to RBI
  4. D. Government taxes exports

Correct answer

Option B: RBI lends to commercial banks

Repo rate is the rate at which the Reserve Bank of India lends short-term funds to commercial banks against eligible securities. It is an important monetary policy tool.

Why the other options are wrong

  • Banks lending to customers refers to lending rates charged by banks, not repo rate.
  • Customers do not lend to RBI in this context.
  • Export taxation is a fiscal or trade policy matter, not repo rate.

Solution method

  1. Name both parties to the transaction before thinking about the policy effect.
  2. Trace the direction of funds: who receives liquidity and who provides it.
  3. Only then connect a rate change with borrowing conditions and monetary transmission.

Concept boundary

The repo rate is the rate at which the central bank lends short-term funds to commercial banks against eligible securities under the relevant framework. It should not be confused with a deposit rate, a retail bank loan rate or the cash reserve ratio. Those concepts can interact with monetary policy but describe different instruments.

Transfer practice

If the policy repo rate rises, what is the immediate direct change in the repo transaction?

Check the transfer answer

Eligible borrowing by banks from the central bank becomes more expensive

The direct effect is on the price of that borrowing. Wider effects on loans, demand and inflation depend on transmission through the financial system.

Practice tip

For economy terms, write who acts on whom: RBI to banks, banks to customers, or government to taxpayers.

This is original practice material for concept review, not a claim that the same wording will appear in an official paper. Report an unclear or outdated explanation through the contact page.

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