Monetary Policy — Set 1
Banking · मौद्रिक नीति · Questions 1–10 of 120
What is the primary objective of the Reserve Bank of India’s Monetary Policy?
Correct Answer: D. To maintain price stability while keeping in
The Reserve Bank of India Act, 1934, mandates price stability as the primary goal of monetary policy. Maintaining price stability is essential for sustainable economic growth over the long term. This objective is achieved through the use of various policy instruments like interest rates.
Which committee is responsible for determining the policy interest rate in India?
Correct Answer: A. Monetary Policy Committee
The Monetary Policy Committee (MPC) was established to decide the benchmark policy rate required to contain inflation. It is a six-member committee consisting of three internal members from RBI and three external members appointed by the Government. This statutory framework was introduced to bring transparency and accountability to monetary policy decisions.
What is the frequency of the ordinary meetings of the Monetary Policy Committee (MPC) in a year?
Correct Answer: B. At least four times
According to the RBI Act, the Monetary Policy Committee must meet at least four times in a year. Currently, the committee usually meets every two months to review the economic situation. The schedule of these meetings is announced well in advance at the beginning of each financial year.
What is the target inflation range set for the RBI under the current flexible inflation targeting framework?
Correct Answer: A. 4% with a margin of +/- 2%
The Government of India, in consultation with the RBI, has set the inflation target at 4% with an upper tolerance limit of 6% and a lower limit of 2%. This target is measured based on the Consumer Price Index (CPI). Adhering to this range helps maintain macroeconomic stability and inflation expectations.
Which of the following is considered a 'Quantitative' tool of monetary policy?
Correct Answer: C. Cash Reserve Ratio
Quantitative tools like the Cash Reserve Ratio (CRR) are designed to regulate the total volume of credit in the banking system. They affect all sectors of the economy simultaneously by changing the liquidity available with banks. Qualitative tools, on the other hand, target specific sectors of the economy.
What happens to the money supply in the economy when the RBI increases the Cash Reserve Ratio (CRR)?
Correct Answer: A. It decreases
The correct answer is 'It decreases'. Increasing the CRR means banks must keep a larger portion of their deposits as cash with the RBI. This reduces the amount of lendable funds available to banks, thereby decreasing the money supply. It is a contractionary measure used to curb high inflation.
Which rate is defined as the interest rate at which the RBI provides overnight liquidity to banks against the collateral of government securities?
Correct Answer: D. Repo Rate
The Repo Rate is the primary policy rate used by the RBI to manage liquidity in the economy. Banks borrow from the RBI at this rate by selling securities with an agreement to repurchase them. A change in the Repo Rate typically influences the interest rates of commercial banks.
What is the primary purpose of the Statutory Liquidity Ratio (SLR)?
Correct Answer: D. To ensure banks maintain a portion of
SLR requires banks to maintain a minimum percentage of their net demand and time liabilities in the form of gold, cash, or unencumbered government securities. It serves as a safety cushion for depositors and also helps the government borrow from the banking system. SLR is a mandatory reserve requirement that banks must fulfill daily.
Which of the following is a 'Qualitative' or 'Selective' tool of monetary policy?
Correct Answer: B. Margin Requirements
Qualitative tools like margin requirements are used to control the flow of credit to specific sectors or for specific purposes. They do not affect the total quantity of money but rather the direction of credit. Margin requirement refers to the difference between the market value of a security and the loan amount granted against it.
What is 'Moral Suasion' in the context of monetary policy?
Correct Answer: B. Informal persuasion and advice by the
Moral suasion is a qualitative tool where the central bank uses psychological pressure and informal suggestions to guide commercial banks. The RBI may advise banks to restrict credit for speculative purposes or lower interest rates during a slowdown. It does not carry legal force but is generally followed due to the RBI's authority.