Bank Rates and Monetary Policy Questions and Answers

Answer: A

Reverse Repo Rate: The rate at which the RBI is willing to borrow from the commercial banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that the RBI is willing to offer lucrative interest rate to commercial banks to park their money with the RBI. This results in a reduction in the amount of money available for the bank’s customers as banks prefer to park their money with the RBI as it involves higher safety. This naturally leads to a higher rate of interest which the banks will demand from their customers for lending money to them, thereby causing reduction in liquidity.

Answer: D

Correct answer: All of the Above

Monetary management regulates all three dimensions together. Availability concerns how much credit banks can extend, governed by the reserve requirements and by open market operations. Cost concerns the rate of interest, governed by the policy rate.

Use concerns the direction of credit, governed by selective controls, priority sector requirements and margin stipulations. The three are not alternatives: a policy stance typically works on quantity and price simultaneously, with selective measures added where a particular sector needs restraining or encouraging.

Answer: C

Purchase and sale of govt securities by RBI. OMOs are conducted by the RBI via the sale/purchase of government securities (G-Sec) to/from the market with the primary aim of modulating rupee liquidity conditions in the market.

Answer: C

Correct answer: Unchanged

The repo rate was held unchanged at the second bi-monthly review. The Monetary Policy Committee cited uncertainty about the inflation path and chose to await further data before moving.

Holding is itself a policy decision rather than an absence of one: the Committee votes on it, records the reasoning in the statement and minutes, and signals its assessment of the balance between growth and inflation. Most meetings in any cycle end in a hold, with changes concentrated at turning points.

Answer: D

Correct answer: None of These

All three statements about moral suasion are correct, so none is incorrect. Under moral suasion the RBI persuades rather than compels: it may request banks not to lend for unproductive purposes, on the grounds that such credit adds to inflationary pressure without adding to productive capacity or economic development.

The instrument's character is that it carries no statutory force - it rests on the RBI's authority and on the banks' interest in maintaining a good relationship with their regulator. It is classified as a qualitative or selective control rather than a quantitative one.

Answer: C

Correct answer: 6 percent

On 2 August 2017 the Monetary Policy Committee cut the repo rate by 25 basis points to 6 per cent, the lowest in several years at the time, with the reverse repo falling correspondingly to 5.75 per cent.

The reduction was justified by inflation having fallen well below the 4 per cent target, giving the Committee room to support growth. It was the only cut of that financial year, the Committee holding rates at subsequent meetings as inflation began to firm.

Answer: C

Correct answer: Prices

Inflation is a sustained increase in the general level of prices, measured by a price index such as the consumer price index or the wholesale price index.

Two qualifications are built into the definition. It must be sustained, so a one-off jump in a single month is not inflation; and it must be general, so a rise in the price of one commodity, however sharp, is a relative price change rather than inflation. Because it erodes the purchasing power of money, controlling it is the central object of monetary policy.

Answer: B

Correct answer: Low Taxes

Taxation is fiscal policy, set by the government, and lies entirely outside a central bank's mandate. A central bank has no power to change tax rates and no responsibility for them.

The other three are recognised monetary policy goals - the Federal Reserve's statutory mandate names maximum employment, stable prices and moderate long-term interest rates. The separation matters: the central bank controls money and credit, the government controls spending and taxation, and confusing the two obscures who is accountable for what.

Answer: B

Correct answer: Blockchain

The committee was constituted to study blockchain, the distributed ledger technology underlying cryptocurrencies but applicable far more widely - to payments, trade finance, securities settlement and the maintenance of registries.

The work was taken forward through the Institute for Development and Research in Banking Technology, the RBI's technology arm, which produced a white paper and a proof of concept for trade finance. The interest was in the ledger technology itself rather than in cryptocurrency, towards which the RBI remained consistently cautious.

Answer: C

Correct answer: 25%

The transfer of ₹65,896 crore was about 25 per cent above the preceding year's ₹52,679 crore.

The RBI's surplus arises chiefly from the return on its holdings of domestic and foreign securities, less its expenditure and the provisions it makes for contingencies and currency revaluation. Because it is a substantial receipt for the Centre, the size of the transfer and the level of the reserves retained have been a recurring subject of debate between the Bank and the government.