Monetary Policy — Set 12

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

• **To manage durable liquidity and steer interest rates in the banking system** = OMO is RBI's primary tool for long-term liquidity management — buying G-secs pumps in rupees; selling G-secs drains them, keeping WACR within the LAF corridor. • **Interest rate channel** — OMO purchases also push up bond prices, lowering yields, which feeds into lower long-term lending rates — so OMO works on both quantity (liquidity) and price (rates). • RBI conducts OMO based on structural (durable) liquidity needs, unlike repo/reverse repo which handle day-to-day (transient) liquidity. • 💡 Promoting digital banking (A) and increasing ATMs (B) are financial inclusion/infrastructure measures — not monetary tools; auditing bank accounts (D) is the function of RBI's inspection departments, not OMO.

Correct Answer: C. Government of India in

• **Government of India in consultation with RBI** = under the RBI Act (amended 2016), the Central Government sets the inflation target once every five years after consulting the Reserve Bank — it is a joint decision, not unilateral. • **Current target** — CPI inflation at 4% with a lower tolerance limit of 2% and upper limit of 6%; MPC must report to Parliament if target is missed for 3 consecutive quarters. • This framework makes RBI accountable (must explain failures) while giving the government democratic oversight over the inflation objective. • 💡 MPC (A) is wrong — MPC decides how to achieve the target (via repo rate), not what the target is; Parliament alone (B) is wrong — Parliament does not set monetary targets directly; RBI Governor alone (D) is wrong — the 2016 reform specifically moved this power to the government-RBI consultation process.

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

• **Credit Rationing** = a qualitative tool where RBI fixes maximum credit limits for specific industries, sectors, or purposes — banks cannot lend beyond these ceilings to the designated sectors even if demand exists. • **Selective targeting** — rationing restricts speculative or low-priority lending (e.g., luxury real estate, commodity hoarding) while freeing credit flow to productive sectors like agriculture, manufacturing, and exports. • Unlike Moral Suasion (persuasion) or Direct Action (punishment), Credit Rationing works through mandated quantitative caps on sector-specific lending. • 💡 Giving food (A) is completely absurd; reducing branches (C) is a banking expansion decision, not monetary policy; printing currency (D) is the opposite of rationing — it expands money supply.

Correct Answer: A. Overnight borrowing window for banks

• **MSF = overnight emergency borrowing window for scheduled commercial banks** — when banks face acute liquidity shortage and inter-bank market rates spike, they can borrow overnight from RBI at the MSF rate by pledging government securities. • **Unique feature** — banks can pledge even SLR-eligible securities (up to 2% of their NDTL) as collateral for MSF, allowing them to temporarily dip below the mandated SLR level during crises. • MSF rate = Repo Rate + 25 bps, making it costlier than normal repo and acting as a ceiling for overnight call money rates (WACR cannot rise above MSF rate in a normal market). • 💡 Scheme for small farmers (B) describes PM Kisan or MUDRA — rural credit schemes; gold reserve management (C) is done by RBI's reserves management team; infrastructure loans (D) are long-term, not overnight — MSF is strictly an overnight window.

Correct Answer: C. To manage money supply and

• **Monetary Policy's primary purpose = maintaining price stability (controlling inflation) while supporting economic growth** — RBI achieves this by managing money supply, credit availability, and interest rates through various quantitative and qualitative tools. • **India's legal mandate** — under the RBI Act (amended 2016), RBI's primary objective is to maintain CPI inflation at 4% (±2%); growth is a secondary objective pursued subject to price stability. • Monetary policy differs fundamentally from Fiscal Policy (government spending and taxes) — monetary policy operates through interest rates and credit, not budgetary allocations. • 💡 Regulating foreign trade (A) is handled by DGFT/Ministry of Commerce and RBI's forex management role — not the primary monetary policy function; building roads (B) is capital expenditure/fiscal policy; collecting income tax (D) is the role of the Income Tax Department under the Finance Ministry.

Correct Answer: A. 6

• **6 members** = 3 from RBI (Governor as Chairperson, Deputy Governor in-charge of monetary policy, one officer nominated by RBI Central Board) + 3 external members appointed by the Government of India for 4-year terms. • **Voting** — each member has one vote; in case of a tie, the Governor exercises a casting vote, ensuring no deadlock in policy decisions. • The 6-member design provides a checks-and-balances structure: neither the government nor RBI alone controls rate decisions. • 💡 4 (B) is wrong — that is not the statutory size; 8 (C) is wrong; 3 (D) is wrong — these numbers have no basis in the RBI Act. Only 6 is correct.

Correct Answer: B. 4% with ±2% band

• **4% CPI inflation with ±2% tolerance band** = the Government-set target means MPC must aim for 4%; the band of 2%–6% is the acceptable range; breach for 3 consecutive quarters triggers a mandatory report to Parliament explaining failure and remedial steps. • **Set by Government, not MPC** — the Government of India sets this target in consultation with RBI every five years; MPC's job is to decide the repo rate to hit this target. • The 4% target reflects India's development needs — low enough to protect purchasing power, high enough to allow real sector flexibility and accommodate supply shocks. • 💡 2% ±1% (A) describes the US Fed's 2% target — not India's; 6% ±2% (C) is the upper tolerance limit, not the midpoint; 5% ±1% (D) is a fabricated figure — none have a basis in the RBI Act framework.

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

• **Quantitative Easing (QE)** = an unconventional monetary policy where the central bank purchases large amounts of government bonds and financial assets from the open market to directly inject money into the economy when interest rates are already near zero and conventional tools are exhausted. • **Used in extreme conditions** — QE was famously deployed by the US Fed, ECB, and Bank of Japan after the 2008 financial crisis and during COVID-19; India uses OMO (a milder form) but has not formally used QE. • QE works by expanding the central bank's balance sheet, flooding banks with reserves, lowering long-term yields, and encouraging lending and investment. • 💡 Reducing government spending (B) is contractionary fiscal policy — opposite of QE; increasing tax rates (C) is also contractionary and fiscal, not monetary; raising interest rates (D) is conventional tightening — the opposite of QE's intent.

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

• **Hawkish = favoring higher interest rates to control inflation** — a hawkish MPC member or stance prioritizes bringing CPI down to target even if it means slowing growth or tightening credit conditions. • **Hawkish vs. Dovish** — Dovish (B) is the opposite: prefers lower rates to boost growth and employment; Neutral (C) means no clear bias toward hikes or cuts; Hawkish signals upcoming rate hikes or resistance to cuts. • In MPC meeting minutes, when members cite persistent core inflation or risks to the 4% target, they are expressing a hawkish view. • 💡 Currency devaluation (A) is an exchange rate/forex policy concept, not a monetary policy stance label; lower rates for growth (B) is Dovish — the exact opposite of Hawkish; neutral stance (C) is its own distinct category.

Correct Answer: B. 4 times

• **Minimum 4 times per year** = the RBI Act mandates MPC must meet at least 4 times in each financial year to review the policy stance and decide the repo rate. • **In practice, 6 meetings** — RBI schedules MPC meetings every two months (bi-monthly), resulting in 6 meetings per year; each meeting lasts 3 days with the rate decision announced on the final day. • After each meeting, minutes are released within 14 days, and each member must publish their voting rationale — ensuring transparency and accountability. • 💡 2 times (A) is below the legal minimum; 12 times (C) would mean monthly meetings — that is the US Fed's FOMC schedule, not MPC's; 6 times (D) is the actual practice but not the statutory minimum — the legal floor is 4.