RBI & Policy — Set 11

Correct Answer: A. Bank Rate

• **Bank Rate is also called the Discount Rate** = the Bank Rate is historically called the Discount Rate because it was the rate at which the RBI rediscounted (purchased) commercial bills from banks. • **Now a penalty rate, higher than Repo** — in modern usage, the Bank Rate is aligned with the MSF rate and charged as a penalty for reserve shortfalls; it is always higher than the Repo Rate. • 💡 Wrong-option analysis: [Option B] Repo Rate: the current primary short-term liquidity tool, not the discount rate; [Option C] MSF Rate: an emergency overnight window rate; while aligned with the Bank Rate, MSF Rate refers to the specific emergency window; [Option D] Reverse Repo Rate: the rate at which the RBI borrows from banks, unrelated to discounting bills.

Correct Answer: A. CPI (Combined)

• **CPI (Combined) is RBI's inflation measure** = the Consumer Price Index (Combined) is the primary inflation gauge used by the RBI for its monetary policy target, measuring retail price changes for consumers. • **4% target with ±2% tolerance** — CPI replaced WPI as the headline inflation measure; it better captures consumer-level price experience than wholesale price movements. • 💡 Wrong-option analysis: [Option B] GDP Deflator: measures economy-wide price changes for national accounts; not the RBI's policy target; [Option C] WPI: measures prices at producer/wholesale level; the earlier policy measure, now replaced by CPI; [Option D] PPI: Producer Price Index is not officially used as India's primary inflation measure for monetary policy.

Correct Answer: B. Qualitative tool

• **Moral Suasion is a qualitative tool** = moral suasion is a qualitative (selective) credit control instrument where the RBI informally persuades banks to follow specific lending policies without issuing binding orders. • **Informal and non-legal** — it relies on the RBI's authority and institutional prestige; it can target specific sectors without affecting the overall money supply, unlike quantitative tools. • 💡 Wrong-option analysis: [Option A] Fiscal tool: fiscal tools are government instruments like taxes and spending; moral suasion is a monetary/credit tool; [Option C] Quantitative tool: quantitative tools like CRR and Repo Rate uniformly affect the total volume of credit; [Option D] Trade tool: involves import-export regulations and tariffs, unrelated to credit control.

Correct Answer: D. DICGC

• **DICGC insures bank deposits** = the Deposit Insurance and Credit Guarantee Corporation is the RBI subsidiary that insures deposits in commercial and cooperative banks up to ₹5 lakh per depositor per bank. • **₹5 lakh coverage (enhanced in 2020)** — the cover was raised from ₹1 lakh to ₹5 lakh in February 2020; it covers both principal and interest, protecting small savers in case of bank failure. • 💡 Wrong-option analysis: [Option A] IFTAS: provides payment system infrastructure like NEFT, not deposit insurance; [Option B] ReBIT: handles IT and cybersecurity for the RBI and regulated entities, not deposit insurance; [Option C] BRBNMPL: the currency note printing subsidiary of the RBI.

Correct Answer: D. 1956

• **Minimum Reserve System adopted in 1956** = the RBI shifted to the Minimum Reserve System for currency issuance in 1956, replacing the earlier Proportional Reserve System. • **₹200 crore minimum reserve; ₹115 crore in gold** — this system allows greater flexibility in issuing currency to meet economic needs without being constrained by a proportional gold backing requirement. • 💡 Wrong-option analysis: [Option A] 1949: the year of RBI nationalization, not MRS adoption; [Option B] 1991: the year of India's major economic liberalization reforms; the MRS was adopted decades earlier; [Option C] 1935: the RBI's founding year, when it followed the Proportional Reserve System.

Correct Answer: A. Mumbai

• **RBI headquartered in Mumbai** = the Reserve Bank of India's Central Office, where the Governor and Deputy Governors work and all major policy decisions are made, is located in Mumbai. • **Moved from Kolkata in 1937** — Mumbai was chosen for its role as India's financial capital; the Central Board and MPC meetings are held here. • 💡 Wrong-option analysis: [Option B] Delhi: houses RBI's northern regional office but not the headquarters; [Option C] Chennai: hosts the RBI Staff College and southern regional office, not the headquarters; [Option D] Kolkata: the original first headquarters (1935–1937); the RBI moved permanently to Mumbai in 1937.

Correct Answer: D. 10

• **10 directors nominated by Government to RBI Central Board** = the Government of India nominates 10 directors from diverse fields plus 2 government officials to the RBI's Central Board. • **21 total board members** — including the Governor and maximum 4 Deputy Governors, the Central Board totals 21 members; diverse expertise ensures balanced governance of the central bank. • 💡 Wrong-option analysis: [Option A] 15: the RBI Act specifies 10 government-nominated directors plus 2 officials; 15 is not the number; [Option B] 21: the total board size, not the number of government-nominated members; [Option C] 4: the maximum number of Deputy Governors, not the count of nominated directors.

Correct Answer: A. Regulating Money Market

• **RBI regulates the Money Market** = the RBI is the regulator and supervisor of India's money market, managing short-term liquidity, call money rates, and commercial paper markets. • **SEBI for stocks, IRDAI for insurance** — the RBI's mandate covers the monetary and banking domain; equity markets are SEBI's, insurance is IRDAI's, and trade is the Commerce Ministry's domain. • 💡 Wrong-option analysis: [Option B] Regulating Insurance: IRDAI's mandate; [Option C] Regulating Trade: handled by the Ministry of Commerce and DGFT; [Option D] Regulating Stock Market: SEBI's mandate under the SEBI Act.

Correct Answer: B. Absorb liquidity

• **Reverse Repo Rate absorbs liquidity** = the Reverse Repo Rate is the interest the RBI pays commercial banks when they park surplus funds with the RBI, effectively withdrawing excess liquidity from the system. • **Higher rate = more parking of funds = less lending** — raising the Reverse Repo Rate makes it more attractive for banks to deposit money with the RBI, reducing the money supply available for lending. • 💡 Wrong-option analysis: [Option A] Inject liquidity: liquidity injection is done through the Repo Rate (RBI lending to banks), not the Reverse Repo Rate; [Option C] Lower bank costs: the Reverse Repo Rate earns money for banks, but that does not lower their operating costs; [Option D] Increase inflation: absorbing liquidity through a higher Reverse Repo Rate aims to reduce, not increase, inflationary pressures.

Correct Answer: B. M1

• **M1 = Narrow Money** = M1 is the most liquid measure of money supply, comprising currency held by the public plus demand deposits (current and savings accounts) with banks. • **Excludes Fixed Deposits** — fixed deposits and other time deposits cannot be immediately used for transactions and are excluded from M1; they are captured in M3 (broad money). • 💡 Wrong-option analysis: [Option A] M3: 'broad money' including M1 plus time deposits; not narrow money; [Option C] M4: the broadest measure including M3 plus post office deposits; [Option D] M2: an intermediate measure broader than M1 but narrower than M3.