Monetary Policy — Set 6

Correct Answer: D. Store of value

Inflation erodes the purchasing power of money, meaning it reduces how much a unit of currency can buy over time. Therefore, money becomes less effective as a 'store of value'. Central banks try to keep inflation low to protect the value of people's savings.

Correct Answer: A. Penalizing or banning a bank from

Direct Action is a qualitative tool where the RBI takes strict penal measures against a bank that fails to follow its directives. This could include imposing a heavy fine or restricting the bank's lending activities. It is used as a last resort when persuasion and advice fail.

Correct Answer: A. Four years

External members of the MPC are appointed for a non-renewable term of four years. This ensures that the committee is regularly refreshed with new ideas and perspectives. The members are chosen by a search-cum-selection committee headed by the Cabinet Secretary.

Correct Answer: C. It is mandatory under the Banking Regulation

SLR is a legal requirement under Section 24 of the Banking Regulation Act. All commercial banks must maintain this ratio without fail. Failure to maintain SLR leads to the imposition of a penalty by the RBI.

Correct Answer: B. Total of currency held by

High-powered money, denoted as M0, is the monetary base of the economy. It consists of the currency in circulation and the reserves kept by banks with the central bank. It is the foundation on which the total money supply of the country is built.

Correct Answer: A. Tight Monetary Policy

A tight monetary policy involves increasing interest rates and reserve requirements. It is designed to 'tighten' the availability of money to curb inflation. This is often described as a 'hawkish' approach in financial markets.

Correct Answer: C. They must be published on the 14th day after

The RBI must publish the minutes of the MPC meeting on the 14th day following the meeting. These minutes include the resolution passed and how each member voted, along with their individual statements. This provides high transparency regarding the committee's thought process.

Correct Answer: B. Interest rates are likely to fall

Excess liquidity means banks have more cash than they need. To lend this money, they are likely to reduce their lending rates, making credit cheaper. While this can support growth, too much liquidity for too long can lead to high inflation.

Correct Answer: C. It varies as per MPC decisions

The correct answer is 'It varies as per MPC decisions'. While the width of the corridor was historically 50 or 100 basis points, the MPC now decides it based on the prevailing market conditions. The corridor is the gap between the MSF rate and the SDF rate. It provides a bounded range for the overnight call money rates.

Correct Answer: C. Market Stabilization

The Market Stabilization Scheme (MSS) was specifically created to manage the liquidity impact of large foreign exchange inflows. When RBI buys dollars to prevent the rupee from appreciating too much, it releases rupees into the system. MSS allows the RBI to mop up those extra rupees by issuing bonds.