Monetary Policy & RBI Tools — Set 19

Correct Answer: C. Treasury bills (91-day)

Treasury Bills (T-Bills), issued by the Government of India through RBI, are short-term money market instruments with maturities of 91 days, 182 days, and 364 days. They are zero-coupon instruments sold at a discount and redeemed at face value. RBI conducts OMO operations using T-Bills alongside dated government securities. Other money market instruments include call money, commercial paper, and certificates of deposit.

Correct Answer: B. Market where banks borrow/lend overnight funds; highly sensitive to RBI rate changes

The call money market is an overnight (or very short-term, up to 14 days) inter-bank borrowing and lending market. Call money rates (MIBOR — Mumbai Inter-Bank Offer Rate) are highly sensitive to RBI's repo and reverse repo rates. The LAF corridor anchors call money rates within the repo-reverse repo band. Tight call money conditions signal liquidity stress in the banking system.

Correct Answer: B. Mumbai Inter-Bank Offer Rate (overnight benchmark rate)

MIBOR (Mumbai Inter-Bank Offer Rate) is India's overnight benchmark interest rate at which banks lend to each other in the interbank market. It is determined daily through a polling process administered by FBIL (Financial Benchmarks India Pvt Ltd). MIBOR is the Indian equivalent of LIBOR and serves as a reference rate for various financial products. It moves closely in line with RBI's repo rate.

Correct Answer: B. Term Repo

Term Repos are repurchase agreements conducted by RBI for periods beyond overnight (e.g., 7-day, 14-day, 28-day). Unlike overnight repos under LAF, term repos provide liquidity for longer periods, reducing the need for banks to roll over overnight repos daily. RBI introduced term repos as part of the restructuring of the LAF framework to improve liquidity management.

Correct Answer: B. Inflation target is set under the RBI Act as amended in 2016

The inflation target in India has statutory backing through the amendment to the RBI Act, 1934, passed in 2016. Section 45ZA of the RBI Act provides that the Central Government shall, in consultation with the RBI, determine the inflation target by gazette notification every five years. The current 4% CPI target (±2%) is therefore a statutory obligation, not merely an administrative guideline.

Correct Answer: B. SOFR is the new US overnight rate replacing LIBOR; affects pricing of India's external borrowings

SOFR (Secured Overnight Financing Rate) replaced LIBOR (London Inter-Bank Offered Rate) as the global dollar benchmark interest rate from June 2023. This matters for India because many of India's external commercial borrowings (ECBs), foreign currency bonds, and swap agreements were priced using LIBOR. Transition to SOFR required re-negotiation or built-in fallback clauses in thousands of financial contracts.

Correct Answer: B. Higher oil prices increase fuel costs, raise transportation and production costs, driving up CPI inflation

India imports about 85% of its crude oil requirements, making it highly sensitive to international oil prices. Rising oil prices increase fuel costs, raise transportation and production costs, and can directly increase CPI inflation (through fuel component) and indirectly through supply chain cost increases. This complicates RBI's monetary policy — it is supply-side inflation that monetary tightening cannot easily address without hurting growth.

Correct Answer: B. CPI inflation at 4% ±2%

As per Section 45ZA of the RBI Act, as amended in 2016, the statutory inflation target for the MPC is CPI inflation at 4%, with a tolerance band of ±2% (i.e., 2%–6%). The target was set for the period ending March 31, 2026, and must be periodically reviewed and notified by the Government of India every 5 years in consultation with RBI.

Correct Answer: A. Order Book, Inventories, and Capacity Utilisation Survey

OBICUS (Order Books, Inventories, and Capacity Utilisation Survey) is a quarterly survey conducted by the RBI to assess manufacturing sector conditions. It collects data on new orders, backlogs, finished goods inventories, and capacity utilisation rates. Capacity utilisation data is used in assessing the output gap and inflationary pressures for monetary policy decisions.

Correct Answer: B. Survey measuring consumers' perceptions on current and future economic conditions, inflation, and income

The RBI conducts a bi-monthly Consumer Confidence Survey (CCS) in 19 cities to assess households' perceptions on the general economic situation, employment, income, and inflation (current and one-year-ahead). The survey's Current Situation Index (CSI) and Future Expectations Index (FEI) feed into the MPC's assessment of consumer sentiment and inflationary expectations.