Which one of the following is not correct about Repo rate?

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Q: (CDS-I/2020)

Which one of the following is not correct about Repo rate?

question_subject: 

Economics

question_exam: 

CDS-I

stats: 

0,80,249,72,49,98,110

keywords: 

{'repo rate': [0, 0, 1, 1], 'interest rate': [0, 0, 1, 2], 'overnight loan': [0, 0, 0, 1], 'loan contract': [0, 0, 0, 1], 'overnight borrowing': [0, 0, 0, 1], 'central bank': [0, 0, 1, 2], 'commercial bank': [0, 0, 0, 1], 'commercial banks': [0, 0, 1, 1], 'collateral security': [0, 0, 0, 1]}

The repo rate is an instrument of monetary policy that central banks use to control liquidity and inflation in the economy.

Option 1 is correct since the repo rate is the interest rate charged by the Central Bank of an overnight loan to a commercial bank.

Option 2 is also correct. From the commercial bank`s perspective, the repo rate is the interest paid on overnight borrowings from the central bank.

Option 3 is incorrect, and therefore the right answer. In a repo operation, the interest rate isn`t a variable part of the loan contract, rather it is set by the central bank independently and used uniformly in all transactions it conducts with the commercial banks.

Option 4 is potentially misleading: while the repo rate does factor in the cost of collateral security in an indirect way, describing it as `the cost of collateral security` isn`t entirely accurate. It`s better to think of it as the overnight interest rate charged by Central Bank, collateralized against government securities.