Repo rate is the rate at which Reserve Bank of India (RBI) lends commercial banks, and reverse repo rate is the rate at which (RBI) borrows money from commercial banks. Which of the following statements can be inferred from the above passage? A. Decrease in repo rate will increase cost of borrowing and decrease lending by commercial banks. B. Increase in repo rate will decrease cost of borrowing and increase lending by commercial banks. C. Increase in repo rate will decrease cost of borrowing and decrease lending by commercial banks. D. Decrease in repo rate will decrease cost of borrowing and increase lending by commercial banks.

GATE 2020 · General Aptitude · Verbal Reasoning · medium

Answer: D. Decrease in repo rate will decrease cost of borrowing and increase lending by commercial banks.

1. Establish the causal chain from the passage: Repo rate = rate at which RBI lends to commercial banks. If repo rate DECREASES, the cost for commercial banks to borrow from RBI goes DOWN. Lower funding cost means banks can offer loans at lower rates, so lending INCREASES.
2. Check each option against the causal chain: A: decrease repo -> INCREASE cost of borrowing (WRONG - cost falls). B: increase repo -> DECREASE cost (WRONG - higher repo means higher cost). C: increase repo -> decrease cost (WRONG - opposite direction). D: decrease repo -> decrease cost AND increase lending (CORRECT - matches the chain).
3. Confirm option D: Decrease repo rate -> cost of borrowing for banks falls -> banks pass on savings -> lending increases. Option D correctly states: 'Decrease in repo rate will decrease cost of borrowing and increase lending by commercial banks.'