Q. RBI uses the policy instrument Reverse Repo for which of the following purposes:

1. To increase the liquidity of commercial banks
2. To absorb liquidity from commercial banks
3. To reduce the fiscal deficit of the central Government

Select the correct option using the codes given below:
Answer: 1 & 2
Notes: The Reverse Repo rate is the rate at which RBI borrows funds from commercial banks, thereby absorbing excess liquidity from the system. It does not increase liquidity for banks or reduce the fiscal deficit of the central Government. Its primary function is to absorb surplus liquidity by encouraging banks to deposit their funds with the RBI.