Monetary Policy — Set 12

Correct Answer: C. To manage liquidity and interest rates in the

Open Market Operations are primarily used to adjust the amount of money circulating in the banking system. By buying or selling government bonds, the RBI can either increase or decrease the liquidity available to banks. It is a vital tool for indirect monetary control.

Correct Answer: C. Government of India in

The inflation target is set by the Central Government, in consultation with the Reserve Bank, once every five years. The current target is 4% with a range of 2% to 6%. This statutory framework brings accountability to the central bank.

Correct Answer: B. Fixing a limit for loans to be given to

Credit rationing is a qualitative tool where the RBI fixes the maximum limit of credit for different industries or sectors. This is done to prevent excess flow of credit to speculative or less-important sectors. It helps in channeling money to priority areas like agriculture.

Correct Answer: A. Overnight borrowing window for banks

MSF is a facility that allows banks to borrow funds overnight from the RBI when they face a severe liquidity shortage. Banks can borrow by dipping into their SLR securities up to a certain limit. It acts as a safety valve for the banking system.

Correct Answer: C. To manage money supply and

The core purpose of monetary policy is to manage the supply and cost of money in the economy to achieve price stability and support growth. It is the process by which the central bank controls inflation and interest rates. It is different from 'fiscal policy', which is about government spending and taxes.

Correct Answer: A. 6

The correct answer is 6. The MPC has 6 members — 3 from RBI (Governor as chairperson, Deputy Governor, and one RBI official) and 3 external members appointed by the Government. Decisions are taken by majority vote with the Governor having a casting vote in case of a tie. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: B. 4% with ±2% band

The Government set a CPI inflation target of 4% with a tolerance band of ±2% (i.e., 2% to 6%). If inflation breaches this band for three consecutive quarters, the MPC must write to the government explaining the reasons and corrective actions.

Correct Answer: A. Central bank buying large-scale assets to inject

The correct answer is Central bank buying large-scale assets to inject. Quantitative Easing is an unconventional monetary policy where the central bank purchases government bonds and other financial assets to inject liquidity directly into the economy. It is used when conventional tools like interest rate cuts are insufficient. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: D. Favoring higher interest rates to control inflation

The correct answer is Favoring higher interest rates to control inflation. A hawkish stance means the central bank prioritizes controlling inflation over boosting economic growth, typically through higher interest rates. The opposite is a 'dovish' stance which favors lower rates to stimulate growth. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: B. 4 times

The RBI Act mandates that the MPC must meet at least 4 times a year. In practice, it typically meets 6 times (once every two months). The schedule is announced in advance at the beginning of each financial year.