Monetary Policy & RBI Tools — Set 3
Economy Advanced · मौद्रिक नीति और RBI साधन · Questions 21–30 of 200
What is the interest rate corridor in monetary policy?
Correct Answer: B. Range between MSF rate and reverse repo rate
The interest rate corridor is the range between the Marginal Standing Facility (MSF) rate (the ceiling) and the reverse repo rate (the floor), with the policy repo rate in the middle. This corridor provides a framework within which short-term market interest rates are expected to move. A narrow corridor indicates tighter liquidity management.
Which monetary policy tool directly reduces the lendable resources of commercial banks?
Correct Answer: B. CRR increase
An increase in the Cash Reserve Ratio (CRR) directly reduces the funds available with banks for lending, as a higher percentage of their NDTL must be kept with the RBI as cash. This is a quantitative tool that directly controls the money supply. An increase in Repo Rate indirectly raises the cost of borrowing for banks.
The Bank Rate is associated with which function of RBI?
Correct Answer: B. Long-term lending to financial institutions
The Bank Rate is the rate at which RBI provides long-term funds to commercial banks and financial institutions. It is different from the Repo Rate which is for overnight borrowing. Currently, the Bank Rate is aligned to the MSF rate (25 bps above repo). Historically, it was the main policy rate before the introduction of the LAF framework.
Which instrument of monetary policy is classified as a 'qualitative' tool?
Correct Answer: D. Margin requirements
Qualitative (or selective) credit control tools of monetary policy include margin requirements, moral suasion, direct action, and rationing of credit. These tools target specific sectors or types of lending rather than the overall money supply. Quantitative tools like CRR, SLR, and Repo Rate affect the overall credit in the economy.
MCLR stands for:
Correct Answer: B. Marginal Cost of Funds Based Lending Rate
MCLR (Marginal Cost of Funds Based Lending Rate) was introduced by RBI in April 2016, replacing the Base Rate system for calculating lending rates of banks. MCLR is linked to the marginal cost of funds (including repo rate), ensuring better transmission of monetary policy changes to borrowers. Most bank loans (except home loans, which moved to EBLR) are still priced on MCLR.
The inflation targeting framework between RBI and the Government of India was formally established in which year?
Correct Answer: C. 2015
The Monetary Policy Framework Agreement between the Government of India and the RBI was signed in February 2015. This formally adopted flexible inflation targeting with CPI at 4% (±2%) as the primary objective of monetary policy. The agreement was later incorporated into the RBI Act through the amendment in 2016.
Which index does the MPC primarily target for its inflation mandate?
Correct Answer: C. CPI (Combined)
The MPC primarily targets the Consumer Price Index (Combined) — also known as CPI (All India) — which is compiled by the National Statistical Office (NSO). The target is 4% ±2%. WPI (Wholesale Price Index) was previously used but was replaced by CPI as it better reflects consumer-level inflation and cost of living.
Core inflation is defined as:
Correct Answer: C. CPI excluding food and fuel
Core inflation refers to the Consumer Price Index (CPI) after excluding the volatile components of food and fuel prices. It is considered a more stable and persistent measure of underlying inflationary pressures in the economy. RBI monitors core inflation closely because food and fuel prices can be volatile due to supply-side shocks.
What happens when RBI increases the CRR?
Correct Answer: C. Banks have fewer funds to lend, reducing money supply
When RBI increases the CRR, banks are required to keep a larger portion of their deposits with RBI as cash. This reduces the funds available for lending, thereby contracting the money supply in the economy. A higher CRR is used as a tightening measure during periods of high inflation.
RBI's role as 'Banker's Bank' means:
Correct Answer: C. RBI maintains accounts of commercial banks and lends to them
As the Banker's Bank, RBI maintains current accounts (known as Current Accounts with RBI or Cash Reserves) of all scheduled commercial banks. RBI also provides short-term credit to banks through the LAF (repo operations) and acts as lender of last resort. This function is crucial for maintaining stability in the banking system.