Monetary Policy — Set 3

Correct Answer: B. Four members

A minimum of four members must be present for an MPC meeting to proceed. Decisions are generally taken based on a majority vote of those present. This ensures that a diverse set of views is represented in policy making.

Correct Answer: B. Reducing interest rates to encourage

A cheap money policy is adopted when the central bank wants to stimulate economic growth by making credit more affordable. It involves lowering key policy rates like the Repo rate. This encourages consumers to spend and businesses to invest.

Correct Answer: A. A facility that allow banks to

The correct answer is 'A facility that allow banks to'. LAF is a mechanism through which the RBI manages the day-to-day liquidity in the banking system. It consists of Repo auctions and Reverse Repo/SDF operations. By adjusting the rates under LAF, the RBI signals the desired level of short-term interest rates.

Correct Answer: A. Three

The MPC consists of six members in total, out of which three are external members appointed by the Central Government. These external members are experts in the field of economics or banking. They serve for a fixed term of four years and are not eligible for reappointment.

Correct Answer: B. When the policy rate is neither stimulating nor

A neutral stance means that the central bank is not biased towards either raising or lowering interest rates. It suggests that the current interest rates are appropriate given the levels of growth and inflation. The bank will wait for more data before taking a directional step.

Correct Answer: A. RBI keeps it in the form of cash

Banks are required to maintain a certain percentage of their total deposits as cash balances with the RBI. This is known as CRR, and it does not earn any interest for the banks. It is one of the most effective tools for the RBI to control inflation by sucking liquidity.

Correct Answer: D. RBI must submit a report to the

Failure to keep inflation within the 2-6% range for three straight quarters is considered a breach of the inflation mandate. In such cases, the RBI must write a report to the Union Government explaining why it failed and what steps it will take to fix it. This accountability mechanism is built into the statutory framework.

Correct Answer: C. Issuance of securities to absorb liquidity

MSS was introduced in 2004 to help the RBI manage excess liquidity created when it buys foreign exchange. The RBI issues special T-bills and dated securities to mop up this excess money. The money collected is kept in a separate account and not used by the government.

Correct Answer: D. The process by which changes in the policy rate

Monetary transmission is the channel through which a change in the central bank's policy rate (like Repo) flows down to commercial bank rates. Effective transmission ensures that the RBI's decisions actually reach consumers and businesses. In India, challenges in transmission have often led to the introduction of new benchmarks like MCLR and EBLR.

Correct Answer: A. Urjit Patel

The MPC was constituted in 2016 during the tenure of Governor Urjit Patel. The first meeting of the committee took place in October 2016. Before this, the Governor had the sole authority to decide policy rates.