Monetary Policy — Set 10

Correct Answer: D. RBI Governor asking banks to prioritize

Moral suasion is about 'persuasion' rather than 'compulsion'. Meetings where the Governor requests bank CEOs to pass on rate cuts to customers are classic examples. It works because banks value their relationship with the regulator.

Correct Answer: B. It invites banks to park their excess cash at

VRRR is a fine-tuning operation used by the RBI to absorb large amounts of surplus liquidity. Unlike the fixed rate SDF, the interest rate in VRRR is determined by the bids submitted by the banks. It gives the RBI better control over the market interest rates.

Correct Answer: A. M1

M1 is known as narrow money and includes currency held by the public and demand deposits with banks. It can be used immediately for any transaction. M3 is 'Broad Money' and is the most commonly used measure for economic analysis.

Correct Answer: A. To absorb liquidity from banks without

SDF was introduced to strengthen the RBI’s toolkit for managing excess liquidity. Before SDF, the RBI had to provide government bonds to banks every time it absorbed money via Reverse Repo. SDF removes this constraint, making it easier to manage large surpluses of cash in the system.

Correct Answer: C. Being aggressive in controlling inflation

A hawk is an official who is primarily concerned with keeping inflation low. Hawkish policies favor higher interest rates to prevent the economy from overheating. This term is the opposite of 'dovish'.

Correct Answer: A. A policy intended to increase the rate

Reflation is usually pursued when an economy is coming out of a recession or a period of deflation. The goal is to stimulate demand and bring prices back to a healthy, stable level. It involves lowering interest rates and increasing government spending.

Correct Answer: D. The primary operating target of the RBI's monetary policy

WACR is the average rate at which banks lend to each other overnight in the inter-bank market. RBI’s monetary policy objective is to keep the WACR close to the policy repo rate. It is the most sensitive indicator of liquidity in the banking system.

Correct Answer: C. Margin

Quantitative tools like Repo and CRR affect the whole economy. Qualitative tools like margin requirements can be applied only to specific sectors, like real estate or gold, to curb rising prices in just that area. This makes them 'selective' instruments.

Correct Answer: D. The hidden cost to holders of cash due

Inflation tax is not an actual tax collected by a government. Instead, it is the economic loss that people suffer when the value of their money decreases while the government benefits by being able to pay off its debts with 'cheaper' money. It effectively acts as a transfer of wealth from cash-holders to the government.

Correct Answer: C. Cash Reserve Ratio

Cash Reserve Ratio is a specific percentage of total deposits that commercial banks must keep with the RBI in the form of cash. No interest is paid by the RBI on this amount. It is used as a tool to control the money supply in the economy.