Bank Rates and Monetary Policy Questions and Answers

Answer: B

Correct answer: Economic Development

The formulation is that monetary policy promotes economic development with considerable emphasis on price stability - the two held together rather than one subordinated to the other.

The emphasis on stability is not an end in itself but a condition of development: high and variable inflation distorts investment decisions, erodes savings and falls hardest on those with fixed incomes, so it undermines the growth it might appear to accompany. This is the reasoning behind the flexible inflation targeting framework adopted in 2016.

Answer: B

Correct answer: Malvika Sinha

Malvika Sinha was appointed an Executive Director of the Reserve Bank with effect from 3 April 2017.

Executive Directors head the Bank's operating departments and rank below the Deputy Governors, taking charge of areas such as financial markets, regulation, supervision or currency management. They are appointed from within the Bank's own service, and the position is the usual route by which senior officers advance to Deputy Governor.

Answer: A

Correct answer: TS Anantharaman

T. S. Anantharaman was appointed part-time chairman of the Catholic Syrian Bank.

The RBI must approve such appointments in private sector banks, as it does the appointment of managing directors and whole-time directors, under its powers over the fitness and propriety of bank management. A part-time, non-executive chairman is the structure the RBI has generally favoured for private banks, separating the chairman's oversight role from the chief executive's management of the business.

Answer: A

Correct answer: Buys Securities

To increase bank reserves the Federal Reserve buys government securities. It pays for them by crediting the sellers' bank accounts, so new reserves enter the banking system and banks can support more lending.

Selling securities does the reverse, draining reserves as buyers pay for the paper. The mechanism is the same as the RBI's open market operations, and it is the everyday tool of liquidity management in both systems because it acts quickly and can be applied in fine gradations.

Answer: A

Correct answer: Repo rate

The repo rate is the rate at which the RBI lends short-term funds to banks against government securities sold to it under an agreement to repurchase. It is the policy rate: raising it makes bank funding dearer and tightens credit, lowering it does the reverse.

The reverse repo rate is the mirror transaction, at which the RBI absorbs surplus liquidity by borrowing from banks. The cash reserve ratio and statutory liquidity ratio are not rates at all but proportions of deposits that banks must hold in prescribed form.

Answer: C

Correct answer: 100

The incremental cash reserve ratio was set at 100 per cent, meaning that the entire increase in deposits over the specified fortnight had to be held as reserves with the RBI.

The measure was extraordinary and short-lived, a direct response to demonetisation, which deposited enormous sums into banks in a matter of weeks. Absorbing the whole increment prevented that liquidity from driving down money market rates, and it was withdrawn as soon as market stabilisation scheme issuance could do the same job.

Answer: A

Correct answer: Government Securities

To increase the flow of credit the RBI buys government securities from banks and the public, paying cash and taking the paper onto its own books. The banks' reserves rise, and with larger reserves they can support more lending.

The transaction is the mirror of the contractionary sale, and government paper is used for the same reasons - a deep market, no credit risk, and the ability to transact in size. Buying shares or corporate debentures would expose the central bank to credit risk and to accusations of favouring particular companies.

Answer: A

Correct answer: Banking ombudsman scheme

The RBI widened the Banking Ombudsman Scheme, extending its grounds of complaint to cover deficiencies in mobile and electronic banking and mis-selling of third-party products such as insurance and mutual funds through bank branches.

The scheme gives customers a free avenue of redress against banks without recourse to the courts. Extending it to digital channels and to mis-selling reflected where complaints had actually migrated as banking moved online and as banks increasingly distributed products they did not themselves issue.

Answer: C

Correct answer: Large industrial houses

Large industrial houses were excluded from eligibility under the on-tap universal banking licensing guidelines of 2016.

The concern is connected lending: a bank owned by an industrial group may direct credit to its promoters' own businesses, at terms the market would not offer, and the depositors bear the risk. The conflict is difficult to police through supervision alone, so the RBI has consistently kept large corporate groups out of bank ownership - while permitting them to hold small stakes and to run non-banking financial companies.

Answer: A

Correct answer: Sudarshan Sen

Sudarshan Sen was appointed an Executive Director of the Reserve Bank with effect from 5 July 2016, taking charge of banking regulation.

The department he headed frames the prudential rules for banks - capital adequacy, exposure norms, asset classification and provisioning - and issues the master directions through which they are administered. N. S. Vishwanathan, offered as a distractor, had by then moved up to Deputy Governor.