Monetary Policy & RBI Tools — Set 4
Economy Advanced · मौद्रिक नीति और RBI साधन · Questions 31–40 of 200
What is the primary mandate of the Monetary Policy Committee?
Correct Answer: B. Maintain price stability while supporting growth
The primary mandate of the MPC, as defined in the RBI Act, is to maintain price stability while keeping in mind the objective of growth. Price stability is measured by the CPI inflation target of 4% (±2%). When there is a conflict between inflation control and growth, price stability is given priority in the short run.
Which of the following is a quantitative tool of credit control?
Correct Answer: D. SLR
The correct answer is SLR. Quantitative (general) tools of credit control affect the overall volume of credit in the economy — these include CRR, SLR, Repo Rate, Reverse Repo Rate, OMO, and Bank Rate. Qualitative (selective) tools like moral suasion, margin requirements, credit rationing, and direct action target specific sectors or types of credit. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.
When RBI conducts an OMO purchase (buys government securities), what is the effect?
Correct Answer: B. Liquidity is injected into the system
When RBI buys government securities through Open Market Operations (OMO purchase), it pays for them by crediting the banks' accounts, thereby injecting liquidity into the banking system. This expansionary measure is used when there is a liquidity crunch. Conversely, OMO sales (RBI selling securities) absorb liquidity.
The policy repo rate is the rate at which:
Correct Answer: C. RBI lends to commercial banks overnight against collateral
The policy repo rate is the benchmark interest rate at which RBI lends overnight funds to commercial banks against eligible collateral (government securities). It is the key policy rate used to signal RBI's monetary stance. Changes in the repo rate ripple through the economy by affecting bank lending rates, borrowing costs, and ultimately demand and inflation.
Which committee is responsible for deciding the policy repo rate in India?
Correct Answer: C. Monetary Policy Committee (MPC)
The Monetary Policy Committee (MPC) of the RBI is responsible for setting the policy repo rate. The MPC was constituted under Section 45ZB of the RBI Act, 1934, as amended in 2016. Its decisions are binding on the RBI Governor, unlike the earlier system where the Governor had sole discretionary power.
How many regional offices does the RBI currently have?
Correct Answer: C. 27
The Reserve Bank of India has 27 regional offices spread across India to carry out its functions at the regional level. These offices handle currency management, banking supervision, government banking, and public debt management. Major offices are located in state capitals and major commercial centers.
The term 'NDTL' in banking stands for:
Correct Answer: B. Net Demand and Time Liabilities
The correct answer is Net Demand and Time Liabilities. NDTL stands for Net Demand and Time Liabilities, which represents the total liabilities of a bank to the public including demand deposits (savings and current accounts) and time deposits (fixed deposits), minus inter-bank liabilities. Both CRR and SLR are calculated as a percentage of NDTL. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.
Which of the following best describes 'moral suasion' as a monetary policy tool?
Correct Answer: B. RBI persuades banks through advice, requests, and warnings
Moral suasion is a qualitative credit control tool where RBI uses persuasion, advice, requests, and informal guidance to influence the lending behavior of commercial banks. It is non-statutory and relies on the RBI's authority and the cooperative relationship between RBI and banks. It is often used along with other formal tools.
What is the inflation target set by the Government of India for the RBI under the current framework?
Correct Answer: C. 4% CPI ±2%
The Government of India, under the RBI Act, has set a CPI inflation target of 4% with a tolerance band of ±2% (lower bound: 2%, upper bound: 6%). The MPC is mandated to maintain inflation within this band. If inflation exceeds the upper tolerance limit for three consecutive quarters, the MPC must submit a report explaining the reasons.
The concept of 'transmission mechanism' in monetary policy refers to:
Correct Answer: B. How RBI policy rate changes affect economy-wide interest rates and growth
The correct answer is How RBI policy rate changes affect economy-wide interest rates and growth. The monetary policy transmission mechanism describes how changes in the RBI's policy repo rate eventually affect commercial bank lending rates (via MCLR or EBLR), which then influence investment, consumption, output, employment, and ultimately inflation. Effective transmission requires a well-functioning financial system, and poor transmission remains a key challenge in India. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.