Monetary Policy — Set 3

Correct Answer: B. Four members

• **Quorum = 4 out of 6 members** = at least four members must be present for an MPC meeting to be valid and its decisions to be binding; this includes at least one member from the RBI side. • **Voting** — decisions are made by majority vote of members present; if there is a tie, the Governor (as Chair) casts the deciding vote; each member's vote is recorded and published. • The quorum rule ensures that even if one or two members are unavailable, the MPC can still meet its statutory obligation to review and decide on policy rates at least 4 times a year. • 💡 Three members is wrong — that would be only half the committee and could allow one bloc (RBI members or external members) to have a majority alone; all six members is wrong — requiring 100% attendance could prevent meetings if even one member is ill or abroad; five members is wrong — the Act specifies four as the quorum, not five.

Correct Answer: B. Reducing interest rates to encourage

• **Cheap Money Policy** = a deliberate strategy by the central bank to lower interest rates (especially the policy repo rate) to make borrowing cheaper, encouraging businesses to invest and consumers to spend, thereby stimulating economic growth. • **When adopted** — during recessions, deflation, or economic slowdowns; lower rates reduce the cost of loans (home loans, business loans), increase consumer spending and corporate investment, boosting GDP. • It is the opposite of 'Dear Money Policy' (tight money policy), where rates are raised to curb inflation and excessive borrowing. • 💡 Lending at high interest rates is wrong — that is the 'dear money' or tight money policy, the exact opposite; printing paper money at low cost is wrong — that refers to currency printing costs, not monetary policy stance; removing all taxes on money is wrong — tax policy is fiscal policy handled by the Finance Ministry, entirely separate from monetary policy.

Correct Answer: A. A facility that allow banks to

• **Liquidity Adjustment Facility (LAF)** = the primary monetary policy operating framework through which RBI manages day-to-day liquidity in the banking system using repo (injection) and reverse repo/SDF (absorption) operations. • **LAF corridor** — Floor: SDF rate (repo −25 bps) where banks park excess funds with RBI; Policy rate: Repo rate where RBI lends to banks; Ceiling: MSF rate (repo +25 bps) for emergency borrowing; this 50-bps corridor keeps overnight interbank rates anchored near the repo rate. • Introduced in June 2000, LAF replaced the older system of fixed CRR-based liquidity management; it allows RBI to fine-tune liquidity daily through auctions rather than blunt reserve ratio changes. • 💡 A fund for farmer welfare is wrong — that would be a scheme like PM-KISAN or NABARD funds, unrelated to LAF; a tool to print currency is wrong — currency issuance is a separate RBI function under the Currency Management Dept; a law to regulate bank mergers is wrong — bank mergers are governed by the Banking Regulation Act and approved by RBI/Finance Ministry, not by LAF.

Correct Answer: A. Three

• **3 external members** = out of the MPC's 6 total members, 3 are external experts appointed by the Central Government (not from RBI); they are eminent economists or finance professionals with expertise in economics, banking, or monetary policy. • **Tenure** — external members serve a 4-year term and are not eligible for re-appointment; this prevents conflicts of interest and ensures fresh perspectives in each term. • The equal split (3 RBI + 3 external) was deliberate — it prevents either the Government or RBI from dominating; the Governor's casting vote ensures decisiveness in case of a 3:3 tie. • 💡 Two is wrong — the 2016 RBI Act amendment specifically provides for three external members, not two; four is wrong — there are only three external members (and three internal RBI members); five is wrong — that would leave only one RBI member, completely skewing the balance of the committee.

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

• **Neutral stance** = the MPC is neither biased towards cutting nor hiking rates; the current policy rate is considered appropriate given prevailing inflation and growth conditions — the committee will wait and watch before deciding the next move. • **What it signals** — unlike accommodative (rate cut bias) or withdrawal of accommodation / hawkish (rate hike bias), neutral means the MPC has equal probability of moving in either direction depending on incoming data. • A neutral stance is common when inflation is near the 4% target and GDP growth is on track — the central bank is in 'data-dependent' mode, watching for new signals before committing. • 💡 RBI stops regulating banks is wrong — monetary policy stance has nothing to do with regulatory supervision of banks; that function continues regardless of stance; no interest charged on loans is wrong — zero interest rate policy (ZIRP) is a specific tool used by advanced economies in extreme cases, not the same as a 'neutral' stance; RBI only buys gold is wrong — gold purchases are part of foreign exchange reserve management, completely unrelated to the monetary policy stance.

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

• **CRR is maintained as cash balances with RBI** = banks must keep a specified % of their NDTL as deposits in their current accounts held with the Reserve Bank of India — not in their own vaults or with any other institution. • **Key features** — CRR earns zero interest for banks (it is effectively sterilized money); currently ~4% of NDTL; RBI checks compliance on a daily basis (fortnight average maintained daily). • By holding CRR, RBI directly controls a portion of every bank's deposits, giving it a powerful lever to expand or contract system-wide liquidity without market operations. • 💡 Commercial banks keep it in their own vaults is wrong — if banks kept it themselves, RBI would lose control over that liquidity; vault cash does not count as CRR; SBI keeps it for all banks is wrong — SBI is a commercial bank, not a custodian for other banks' CRR; Finance Ministry keeps it is wrong — CRR is a central bank instrument; the Finance Ministry has no role in its custody or operation.

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

• **RBI must submit a written report to the Central Government** = if CPI inflation stays outside the 2%–6% band for three consecutive quarters, it is a statutory breach of the inflation mandate under the RBI Act (Section 45ZN), triggering a mandatory accountability report. • **Contents of the report** — RBI must explain: (a) the reasons why the target was missed, (b) remedial actions proposed, and (c) the estimated time within which the target will be achieved; the report is published. • This mechanism ensures RBI is publicly accountable for inflation outcomes without compromising its operational independence — there is no automatic punitive action (no dismissal, no license cancellation). • 💡 Governor must resign is wrong — the RBI Act has no provision for mandatory resignation on missing the inflation target; this would make the Governor's job politically fragile; all bank licenses are cancelled is wrong — completely unrelated to monetary policy accountability; currency is demonetized is wrong — demonetisation is an extreme executive decision by the Government, not a consequence of missing an inflation target.

Correct Answer: C. Issuance of securities to absorb liquidity

• **Market Stabilisation Scheme (MSS)** = a sterilisation tool introduced in 2004 (RBI-Government of India agreement) where the Government issues special Treasury Bills and dated securities specifically to absorb excess liquidity from the banking system. • **Why created** — primarily to mop up excess rupee liquidity that RBI creates when it buys foreign exchange (to prevent rupee appreciation); heavily used post-demonetisation (Nov 2016) to absorb the flood of newly deposited cash. • Funds collected under MSS are kept in a separate ring-fenced account with RBI (the MSS cash balance) and cannot be used by the Government for expenditure — this is what makes it a genuine sterilisation tool (unlike normal borrowing). • 💡 A subsidy for the poor is wrong — subsidies are fiscal spending by the Government (food, fertiliser), unrelated to liquidity management; a tool to control stock prices is wrong — RBI has no mandate to control equity prices (that is SEBI's domain); a scheme to buy agricultural produce is wrong — agricultural procurement is done by FCI/state agencies under the MSP scheme, completely different.

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

• **Monetary Policy Transmission** = the process through which a change in RBI's policy rate (repo rate) flows through the financial system to affect commercial bank lending/deposit rates, credit availability, asset prices, exchange rates, and ultimately inflation and growth. • **Channels of transmission** — interest rate channel (main), credit channel (bank lending changes), asset price channel (bond/equity prices affected), exchange rate channel (capital flows affect rupee), and expectations channel (signals change future behaviour). • India has historically faced 'weak transmission' — banks were slow to pass on RBI rate cuts to borrowers; to fix this, RBI moved banks from MCLR-linked loans to External Benchmark Lending Rates (EBLR, linked directly to repo rate) from October 2019. • 💡 Sending money via wire transfer is wrong — that is an inter-bank payment/settlement function (RTGS/NEFT), not monetary transmission; movement of RBI officials is wrong — entirely irrelevant; broadcasting RBI news on radio is wrong — RBI does communicate its decisions publicly, but 'transmission' specifically refers to the economic mechanism by which policy rate changes reach real economy interest rates.

Correct Answer: A. Urjit Patel

• **Urjit Patel** = the MPC was constituted in September 2016 under his governorship; the first MPC meeting was held in October 2016, making him the first Governor to chair MPC proceedings. • **Timeline** — Raghuram Rajan recommended the inflation-targeting framework and proposed the MPC structure (Urjit Patel Committee Report, 2014); but Rajan left in September 2016 just before MPC was formally constituted; Urjit Patel succeeded him and led the inaugural meeting. • The MPC replaced the practice of a single Governor deciding policy rates; Urjit Patel thus presided over a historic shift from individual to collegial monetary policy decision-making in India. • 💡 Shaktikanta Das is wrong — he became RBI Governor in December 2018 (after Urjit Patel resigned), long after the MPC was established; Raghuram Rajan is wrong — he was Governor until September 4, 2016, and left before the MPC was formally constituted (September 29, 2016); D. Subbarao is wrong — he was Governor from 2008 to 2013, well before the MPC existed.