Monetary Policy — Set 5

Correct Answer: B. Lending at repo rate for a tenure

• **LTRO** = a liquidity tool introduced by RBI in February 2020 that allows banks to borrow funds from RBI at the prevailing repo rate for longer tenures of 1 to 3 years (instead of the usual overnight/14-day repo). • **Benefit** — banks receive long-term funds at the cheaper repo rate, enabling them to reduce lending rates on long-duration loans like home and auto loans, transmitting monetary policy to the real economy. • A variant called TLTRO (Targeted LTRO) required banks to invest the funds specifically in corporate bonds and commercial paper of specified sectors. • 💡 'Lending for 15 years' is wrong — LTRO tenors are 1–3 years, not 15; 'A tool to sell gold' is wrong — LTRO involves government securities as collateral, not gold; 'A scheme for retail customers' is wrong — LTRO is an RBI-to-bank operation, retail customers are not counterparties.

Correct Answer: C. The Governor of RBI

• **RBI Governor holds the casting vote** — as per Section 45ZI(8) of the RBI Act, in the event of an equality of votes in the MPC, the Governor exercises a second (casting) vote to break the tie. • **MPC votes by simple majority** — with 6 members, a 3-3 tie is possible; the casting vote ensures a decision is always reached without a deadlock. • This extra voting power makes the Governor the most influential member, reinforcing RBI's lead role in monetary policy even within a committee structure. • 💡 'President of India' is wrong — the President has no role in MPC voting; 'Senior-most external member' is wrong — external members have one vote each, no tiebreaker power; 'Union Finance Minister' is wrong — the Finance Minister is not even a member of MPC.

Correct Answer: B. Standing Deposit

• **Standing Deposit Facility (SDF)** = introduced in April 2022, it allows RBI to absorb excess liquidity from banks overnight without providing any collateral (government securities) in return; banks simply park surplus funds with RBI. • **Replaced fixed reverse repo as the floor** — SDF rate = Repo Rate minus 25 bps; it became the new floor of the LAF corridor, replacing the fixed reverse repo rate operationally. • The key innovation: RBI does not need to have enough securities to offer as collateral, giving it unlimited absorption capacity during liquidity surpluses. • 💡 Bank Rate is wrong — Bank Rate is the rate for advances without collateral from RBI to banks, not the absorption rate; MSF Rate is wrong — MSF is the ceiling rate for banks borrowing from RBI, not absorbing; Reverse Repo Rate is wrong — under reverse repo, RBI provides government securities as collateral; SDF is truly collateral-free.

Correct Answer: B. Urjit Patel Committee

• **Urjit Patel Committee (2014)** = the expert committee chaired by Dr. Urjit Patel (then RBI Deputy Governor) submitted its report in January 2014, recommending a shift to CPI-based inflation targeting and a committee-based rate-setting mechanism. • **Key recommendations implemented** — CPI as the nominal anchor (target: 4% ±2%), formation of a 6-member MPC, and a glide path for inflation reduction; all embodied in the 2016 RBI Act amendment. • The report moved India from a multi-indicator monetary policy approach to a transparent, rules-based FIT framework similar to global best practices. • 💡 Raghuram Rajan Committee is wrong — Rajan chaired committees on financial sector reforms (2008), not the MPC structure; Y.V. Reddy Committee is wrong — Reddy was RBI Governor (2003–08), no committee linked to MPC design; Narasimham Committee is wrong — it dealt with banking sector reforms in 1991 and 1998, not monetary policy committees.

Correct Answer: B. A stance where rates can only stay

• **Calibrated Tightening** = a monetary policy stance where the MPC will either keep the policy rate unchanged or increase it — a rate cut is explicitly ruled out, but hikes are not guaranteed every meeting. • **Directional signal** — it communicates to markets that the easing cycle is over and tightening is the direction of travel; the pace and timing remain data-dependent. • RBI adopted this stance in October 2018 amid rising inflation expectations, before eventually shifting to 'Neutral' when inflation eased. • 💡 'Stalling all monetary policy' is wrong — the central bank continues to actively manage rates; 'Raising rates in every meeting' is wrong — calibrated tightening does not mandate a hike each meeting, only rules out cuts; 'Cutting rates in every meeting' is wrong — that is the definition of an easing cycle, the exact opposite.

Correct Answer: C. Treasury Bills and Dated

• **Treasury Bills and Dated Government Securities** = under MSS, RBI issues these instruments on behalf of the government to drain excess liquidity caused by large foreign capital inflows; the proceeds are kept in a separate MSS account with RBI and are not used for government spending. • **MSS introduced in 2004** — created specifically after large forex inflows flooded the banking system with rupee liquidity; MSS bonds are sometimes called 'Market Stabilization Bonds'. • MSS differs from OMO sales: OMO sales reduce RBI's holdings; MSS involves fresh issuance of government securities (adds to government debt stock but sterilises liquidity). • 💡 'Foreign Currency Swap' is wrong — forex swaps are used for currency market intervention, not MSS instruments; 'Cash Management Bills' is wrong — CMBs are short-term government borrowing tools for cash management, not MSS; 'Stock Options' is wrong — equity derivatives have no role in RBI's monetary operations.

Correct Answer: B. Total inflation in an economy including food and

• **Headline Inflation** = the total, unadjusted CPI inflation figure that includes ALL categories — food, fuel, and core (non-food, non-fuel) items; it is what is reported as the official monthly inflation number. • **RBI's FIT target is on Headline CPI** — the 4% ±2% target applies to headline CPI-Combined; because food and fuel are included, headline inflation is more volatile than core inflation. • When food or oil prices spike (e.g., tomato prices, crude oil), headline inflation jumps sharply even if underlying demand-driven inflation is stable. • 💡 'Inflation calculated by the Prime Minister' is wrong — NSO (a statistical body) calculates it, not any political office; 'Inflation only in rural areas' is wrong — CPI-C is a combined all-India measure; 'Inflation in the price of newspapers' is wrong — 'headline' here means the top-line total figure, not newspaper prices.

Correct Answer: D. There is no statutory floor

• **No statutory floor or ceiling after 2006** — the RBI Act (Amendment) 2006 removed both the minimum (3%) and maximum (15%) limits on CRR that existed previously; RBI now has full discretion to set CRR at any level. • **Before 2006** — the RBI Act prescribed CRR between 3% and 15%; after the amendment, it is purely at RBI's discretion based on liquidity needs. • Currently CRR is around 4%; but this is a policy decision, not a statutory mandate — RBI can theoretically set it at 0% or any higher level. • 💡 'Fixed at 4% forever' is wrong — 4% is the current rate but is changeable; 'Minimum 4%, Maximum 20%' is wrong — these limits never existed in law; 'Minimum 3%, Maximum 15%' is wrong — this was the pre-2006 statutory range, abolished by the 2006 amendment.

Correct Answer: B. Decrease Repo Rate

• **Decrease Repo Rate** = when inflation is below the 4% target (or deflation is a risk), RBI cuts the repo rate to make borrowing cheaper, stimulating consumer spending and business investment — this is expansionary monetary policy. • **Transmission chain** — lower repo rate → banks lower their lending rates → cheaper loans → more consumption and investment → aggregate demand rises → prices rise back toward target. • A repo rate cut also weakens the rupee slightly (capital may flow out), which can boost exports and further stimulate demand. • 💡 'Increase Repo Rate' is wrong — rate hikes fight inflation (high prices), not deflation; 'Increase CRR' is wrong — higher CRR absorbs liquidity and tightens money supply, worsening deflation; 'Increase SLR' is wrong — higher SLR reduces bank lending capacity, further depressing demand and prices — the opposite of what is needed.

Correct Answer: C. Inflation calculated by excluding food and

• **Core Inflation** = CPI inflation after excluding the volatile food and fuel (energy) components; it reflects the persistent, demand-driven price pressures in the economy that are more directly influenced by monetary policy. • **Why it matters** — food and fuel prices are driven by supply shocks (monsoon, crude oil), not monetary policy; core inflation tells RBI whether demand is overheating structurally. • RBI's formal target is headline CPI, but core inflation is closely watched as an indicator of entrenched inflationary pressures; persistently high core inflation warrants rate hikes even if headline is moderate. • 💡 'Inflation in Apple products' is wrong — 'core' refers to the non-food, non-fuel segment of CPI, not any brand; 'Inflation only in the banking sector' is wrong — core CPI covers services and manufactured goods broadly; 'The most important inflation' is wrong — while analytically important, RBI officially targets headline CPI, not core.