Monetary Policy — Set 4
Banking · मौद्रिक नीति · Questions 31–40 of 120
What is 'Dear Money Policy'?
Correct Answer: D. A policy of high interest rates to
Dear Money Policy, also known as a contractionary or 'hawkish' policy, involves raising interest rates to discourage spending. It makes borrowing more expensive (thus 'dear') and helps in controlling rising inflation. It is usually adopted when the economy is overheating.
Which component of monetary policy involves specifying the difference between the loan amount and the market value of collateral?
Correct Answer: C. Margin Requirement
Margin requirement is a selective credit control tool used by the RBI. By increasing the margin, the RBI can reduce the amount of credit flowing into speculative activities. For example, if the margin is 40%, a person can borrow only 60% of the collateral's value.
What is the 'Corridor' in the context of RBI’s Liquidity Adjustment Facility?
Correct Answer: C. The spread between the MSF rate and the SDF rate
The liquidity corridor is the area between the highest rate (MSF) and the lowest rate (SDF) in the LAF framework. The policy Repo rate stays in the middle of this corridor. RBI aims to keep the weighted average call rate (WACR) within this corridor.
What is the primary difference between Bank Rate and Repo Rate?
Correct Answer: A. Repo requires collateral (securities), bank rate does not
The Repo rate is a collateralized lending rate where banks sell securities to the RBI with an agreement to buy them back. The Bank rate is a traditional tool for rediscounting bills and does not involve the sale/purchase of securities. Currently, the Repo rate is the primary tool for short-term liquidity management.
Which year saw the introduction of the 'Flexible Inflation Targeting' (FIT) framework in India?
Correct Answer: D. 2016
The statutory basis for FIT was established in 2016 by amending the RBI Act. It moved the central bank from multiple indicators to a single target of CPI inflation. This reform was based on the recommendations of the Urjit Patel Committee.
Which of the following is NOT a member of the Monetary Policy Committee?
Correct Answer: D. Finance Secretary of India
The Finance Secretary is not a member of the MPC to ensure the central bank’s independence in monetary decisions. The government is represented by three external experts it appoints. The internal members are always from the RBI.
What is 'Credit Rationing'?
Correct Answer: A. Limiting the maximum amount of loans for
The correct answer is 'Limiting the maximum amount of loans for'. Credit rationing is a qualitative tool where the central bank fixes a ceiling or quota for credit to be granted to specific industries. This prevents the over-expansion of credit to non-priority or speculative sectors. It helps in channeling credit to productive sectors of the economy.
What is the effect of an increase in SLR on a bank’s ability to lend?
Correct Answer: A. It decreases lending power
The correct answer is 'It decreases lending power'. When the SLR is increased, banks must invest a larger portion of their deposits in government securities and liquid assets. This leaves them with less money to lend to the general public and businesses. It is often used to tighten the liquidity in the system.
What is 'Withdrawal of Accommodation'?
Correct Answer: C. A transition from a low interest rate
This stance indicates that the central bank is beginning to tighten the money supply after a period of being loose. It usually involves gradual hikes in the policy rate to control rising inflation. It signals that the 'accommodative' phase of supporting growth is ending.
Which entity publishes the Consumer Price Index (Combined) data used by RBI?
Correct Answer: D. National Statistical
The correct answer is 'National Statistical'. The NSO, under the Ministry of Statistics and Programme Implementation, calculates and releases the CPI data every month. This data is the benchmark for the MPC's inflation targeting. It tracks the price changes of a basket of goods and services used by consumers.