Monetary Policy — Set 4

Correct Answer: D. A policy of high interest rates to

• **Dear Money Policy** = a contractionary (hawkish) monetary policy where the central bank raises interest rates sharply to make borrowing expensive, thereby reducing money supply in the economy. • **Purpose** — it is used when inflation is rising dangerously; higher rates discourage loans, cool consumer spending, and slow price rise; the word 'dear' means 'costly' (expensive credit). • Opposite is 'Cheap Money Policy' (expansionary) — where rates are cut to stimulate growth; Dear Money is RBI's anti-inflation weapon. • 💡 'Money used for expensive gifts' is wrong — 'dear' here means costly credit, not gift-giving; 'Giving money to dear ones' is wrong — it has nothing to do with charity; 'Selling gold at low prices' is wrong — gold sales are not part of interest rate policy.

Correct Answer: C. Margin Requirement

• **Margin Requirement** = the difference between the market value of collateral and the loan amount a bank can grant against it; set by RBI as a selective (qualitative) credit control tool. • **How it works** — if margin is 40%, a borrower pledging collateral worth ₹100 can get only ₹60 as loan; raising margin reduces speculative credit flow into stock markets or commodities. • RBI uses it to direct or restrict credit to specific sectors without changing the overall interest rate level. • 💡 CRR is wrong — CRR is a quantitative tool (% of deposits kept as cash with RBI), not about collateral; Moral Suasion is wrong — it uses persuasion, not numerical limits; Repo Rate is wrong — it is the RBI's lending rate, not a collateral rule.

Correct Answer: C. The spread between the MSF rate and the SDF rate

• **LAF Corridor** = the band between the highest overnight rate (MSF rate — ceiling) and the lowest overnight rate (SDF rate — floor) within which the Weighted Average Call Rate (WACR) is expected to operate. • **Policy Repo Rate sits in the middle** — RBI uses repo and SDF operations to keep overnight market rates anchored near the repo rate within this corridor. • The corridor was redesigned in April 2022 when the Standing Deposit Facility (SDF) replaced the fixed reverse repo as the floor, narrowing the corridor. • 💡 'Physical hall in RBI headquarters' is wrong — corridor here is a financial concept, not architecture; 'Time to clear a cheque' is wrong — that is clearing cycle, unrelated; 'Gap between savings and current accounts' is wrong — that refers to interest rate differences between deposit types, not the LAF framework.

Correct Answer: A. Repo requires collateral (securities), bank rate does not

• **Repo Rate requires collateral; Bank Rate does not** — under Repo, banks sell government securities to RBI with a repurchase agreement; under Bank Rate, RBI lends against bills of exchange/commercial paper without collateral or a repurchase agreement. • **Current usage** — Repo Rate is the primary active tool for short-term liquidity management; Bank Rate is now aligned to MSF rate and mainly used as a penalty rate for shortfalls in SLR. • Both are set by RBI (not the government), both are available only to banks (not individuals). • 💡 'Bank rate set by government' is wrong — RBI sets both; 'Individuals borrow at repo rate' is wrong — repo is only between RBI and scheduled commercial banks; 'Repo is long-term' is wrong — repo is typically overnight; Bank Rate historically covered longer maturities.

Correct Answer: D. 2016

• **2016** = the RBI Act, 1934 was amended in May 2016 to give statutory backing to Flexible Inflation Targeting, making CPI inflation control the primary mandate of RBI. • **4% CPI target ±2%** — the government notified a target of 4% CPI inflation with a tolerance band of ±2% (i.e., 2%–6%); the MPC was constituted simultaneously to decide on the policy rate. • The framework was based on the Urjit Patel Committee Report (2014); if RBI fails to meet the target for three consecutive quarters, it must explain to the government. • 💡 1991 is wrong — that was the year of economic liberalisation, not FIT; 2000 is wrong — no major monetary framework change occurred then; 2008 is wrong — that was the global financial crisis year, not FIT introduction.

Correct Answer: D. Finance Secretary of India

• **Finance Secretary is NOT an MPC member** — to protect central bank independence from direct government influence on interest rate decisions, no serving finance ministry official sits on the MPC. • **MPC has 6 members** — 3 from RBI (Governor + Deputy Governor in charge of monetary policy + one RBI Board-nominated officer) and 3 external experts appointed by the Government of India. • Decisions are by majority vote; in case of a tie, the RBI Governor casts the deciding vote. • 💡 'One RBI officer nominated by Board' is wrong as an answer — that person IS a member (internal seat); 'Deputy Governor' is wrong as an answer — also an internal member; 'Governor of RBI' is wrong as an answer — the Governor is the chairperson of MPC.

Correct Answer: A. Limiting the maximum amount of loans for

• **Credit Rationing** = a qualitative monetary tool where RBI fixes a ceiling or quota on the total credit (loans) that banks can extend to specific sectors or for specific purposes. • **Purpose** — prevents excessive lending to speculative or non-priority sectors (e.g., stock market, real estate); ensures credit flows to productive sectors like agriculture and infrastructure. • Unlike CRR/SLR (which affect total money supply), credit rationing targets the direction of credit without changing its overall volume. • 💡 'Increasing interest rate on savings' is wrong — that is a bank deposit pricing decision, not credit rationing; 'Giving food rations on credit' is wrong — completely unrelated; 'Printing more currency' is wrong — that is monetary expansion, the opposite of rationing credit.

Correct Answer: A. It decreases lending power

• **Higher SLR decreases lending power** — banks must park a larger portion of their Net Demand and Time Liabilities (NDTL) in approved liquid assets (government securities, gold, cash); less remains for lending to the public. • **Currently ~18% SLR** — if SLR rises from 18% to 20%, the additional 2% of deposits gets locked into government securities, directly reducing funds available for commercial credit. • RBI raises SLR to absorb liquidity and fund government borrowing; lowers SLR to boost credit flow to the private sector. • 💡 'It increases lending power' is wrong — the exact opposite; a higher SLR locks more funds away; 'It has no effect' is wrong — the mechanical reduction in lendable funds is direct and immediate; 'It makes lending illegal' is wrong — SLR adjustment is a ratio change, not a prohibition.

Correct Answer: C. A transition from a low interest rate

• **Withdrawal of Accommodation** = a monetary policy stance indicating that the central bank is gradually moving away from an easy (accommodative) low-rate policy towards a tighter, higher-rate regime to control inflation. • **Signals intent** — it does not necessarily mean an immediate rate hike every meeting; it tells markets that the era of cheap money is ending and future rate cuts are off the table for now. • RBI adopted this stance in 2022 after keeping rates low during the COVID pandemic; it paves the way for calibrated rate increases. • 💡 'Evicting banks from buildings' is wrong — 'accommodation' here means monetary easing, not housing; 'Stopping government subsidies' is wrong — that is fiscal policy, not monetary stance; 'Allowing banks to fail' is wrong — this stance is about interest rate direction, not bank resolution.

Correct Answer: D. National Statistical

• **National Statistical Office (NSO)** = under the Ministry of Statistics and Programme Implementation (MoSPI), the NSO releases CPI (Combined) data monthly; this is RBI's benchmark inflation measure for its 4% FIT target. • **CPI-C covers all-India** — it combines CPI-Rural and CPI-Urban into a composite index tracking price changes in a representative basket of goods and services consumed by households. • NSO replaced the Central Statistical Office (CSO) in 2019; data is released around the 12th–14th of each month for the previous month. • 💡 NITI Aayog is wrong — it is a policy think-tank, does not compile inflation statistics; RBI is wrong — RBI uses the CPI data; it does not produce it; Finance Ministry is wrong — it monitors fiscal data, not consumer price statistics.