The correct answer is Option 1: The commercial banks borrow from the RBI.

Key Facts About Repo Rate:

Definition: Repo rate stands for Repurchase Option rate. It is the benchmark interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks in India against government securities when banks face a shortage of funds.

Monetary Policy Tool: The RBI uses the repo rate as a crucial tool to regulate liquidity, inflation, and money supply in the economy.

To Control Inflation: The RBI increases the repo rate. This makes borrowing expensive for commercial banks, leading to higher interest rates for public loans, which reduces spending and lowers inflation.

To Boost Growth: The RBI decreases the repo rate. This makes loans cheaper, encouraging businesses and consumers to borrow and spend more.

Context of Other Options:

Option 2 (Commercial banks borrow from other commercial banks): This describes the Interbank Call Money Market rate, which handles short-term, overnight funding requirements between banks.

Option 3 (Commercial banks deposit money to the RBI): This interest rate is known as the Reverse Repo Rate (or managed via tools like the Standing Deposit Facility). It is the rate at which the RBI borrows excess money from commercial banks.

Option 4 (Common people deposit money to the RBI): The general public cannot open bank accounts or deposit money directly with the RBI, as it functions strictly as the central banking regulator and the "Banker to Banks."