Monetary Policy & RBI Tools — Set 7

Correct Answer: C. RBI Governor

The RBI Governor is the Chairperson of the Monetary Policy Committee. The Governor also has a casting vote in case of a tie among the six members. The MPC consists of three RBI members (Governor, Deputy Governor in charge of monetary policy, and one RBI official) and three external members nominated by the Government.

Correct Answer: C. 0.25%

One basis point (bps) equals 0.01%. Therefore, 25 basis points equals 0.25%. In monetary policy, interest rates like the Repo Rate, Reverse Repo Rate, and MSF Rate are typically changed in multiples of 25 basis points (e.g., from 6.25% to 6.50%). Larger changes of 50 bps (0.50%) signal more urgent policy action.

Correct Answer: C. SLR

The Statutory Liquidity Ratio (SLR) can act as an automatic stabiliser because it requires banks to hold government securities, which are liquid. When banks need funds, they can sell these securities in the market. SLR was also historically used to ensure government borrowing is funded. However, the primary automatic stabilisers in the fiscal context are taxation and transfer payments.

Correct Answer: B. Time taken for RBI rate changes to affect real economy variables

Monetary policy transmission lag refers to the time delay between a change in the RBI's policy rate and its full impact on real economic variables such as bank lending rates, investment, output, and inflation. This lag can range from a few months to over a year. Poor transmission due to structural factors is a persistent concern in India's monetary policy.

Correct Answer: C. 3 quarters

The correct answer is 3 quarters. If CPI inflation remains outside the tolerance band (2%–6%) for three consecutive quarters, the MPC is required to submit a report to the Central Government explaining: the reasons for the failure, remedial actions being taken, and an estimated time within which the target will be achieved. This accountability mechanism ensures monetary policy credibility. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: C. Reserve Bank of India

The Reserve Bank of India manages India's foreign exchange (forex) reserves under the Foreign Exchange Management Act (FEMA), 1999. Forex reserves include foreign currency assets, gold, Special Drawing Rights (SDR), and the reserve tranche position in the IMF. As of 2024, India's forex reserves are among the top 4 in the world (~$620-650 billion).

Correct Answer: B. RBI provides emergency credit to banks facing liquidity crisis

As the Lender of Last Resort (LOLR), RBI provides emergency liquidity to commercial banks that are unable to meet their short-term obligations and cannot borrow from other sources. This function is critical for preventing banking panics and systemic financial crises. However, this facility comes with conditions to prevent moral hazard.

Correct Answer: B. Contractionary tightens credit to control inflation; expansionary loosens credit to boost growth

The correct answer is Contractionary tightens credit to control inflation; expansionary loosens credit to boost growth. Contractionary monetary policy (tightening) involves raising the repo rate, increasing CRR/SLR, or selling securities through OMO to reduce money supply and control inflation. Expansionary monetary policy (easing) involves cutting the repo rate, reducing CRR/SLR, or buying securities through OMO to increase money supply and stimulate growth. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: B. 1934

The Reserve Bank of India Act was passed in 1934. Based on the recommendations of the Hilton Young Commission (Royal Commission on Indian Currency and Finance, 1926), the Act provided the legal framework for establishing the RBI. The RBI commenced operations under this Act on April 1, 1935.

Correct Answer: C. Margin requirements on specific loans

Margin requirements are qualitative (selective) credit control tools where RBI specifies the percentage of the loan value that must be financed by the borrower's own funds. By increasing margin requirements for specific loan categories (e.g., stock market lending, commodity trading), RBI can selectively reduce credit to those sectors without affecting overall monetary policy.