Monetary Policy & RBI Tools — Set 8
Economy Advanced · मौद्रिक नीति और RBI साधन · Questions 71–80 of 200
What is the MSF (Marginal Standing Facility) primarily used for?
Correct Answer: B. Emergency overnight borrowing by banks
The Marginal Standing Facility (MSF) is an emergency overnight borrowing window for scheduled commercial banks facing acute liquidity shortages. Under MSF, banks can borrow from RBI at a rate 25 bps above the repo rate, and they can also dip into their SLR holdings (up to 2% of NDTL) to meet the collateral requirement. MSF was introduced in 2011.
How is the Bank Rate related to the MSF Rate?
Correct Answer: B. Bank Rate is aligned to the MSF Rate
Since its revision in 2012, the Bank Rate has been aligned to the Marginal Standing Facility (MSF) rate. Previously, the Bank Rate was an independent long-term policy rate. This alignment simplified the interest rate framework. The Bank Rate is primarily used for purposes like penal interest on banks that do not maintain CRR/SLR.
What are 'Open Market Operations' (OMO) primarily used for?
Correct Answer: B. Managing liquidity in the banking system through government security transactions
Open Market Operations (OMO) are the purchase or sale of government securities by RBI in the secondary market to manage liquidity in the banking system. OMO purchase (buying) injects liquidity; OMO sale (selling) absorbs liquidity. OMOs are flexible and can be conducted at any time, making them a preferred tool for liquidity management.
What is the role of external members in the MPC?
Correct Answer: B. They provide independent expert perspective, not employed by RBI
The three external members of the MPC are independent economists/experts nominated by the Government of India, who are not employed by the RBI or the government. Their role is to bring independent, evidence-based perspectives to monetary policy decisions. They have equal voting rights as RBI members, ensuring diverse viewpoints in policy setting.
The FRBM Act (Fiscal Responsibility and Budget Management Act) is related to monetary policy because:
Correct Answer: B. It prevents fiscal dominance and supports monetary policy independence
The FRBM Act, 2003, was aimed at reducing fiscal deficit and government borrowing, which supports monetary policy by reducing the risk of fiscal dominance (where high government borrowing forces RBI to monetise debt, fuelling inflation). A fiscally disciplined government allows RBI to focus on inflation control. FRBM and IT (inflation targeting) framework complement each other.
When was the Hilton Young Commission (Royal Commission on Indian Currency and Finance) that recommended establishing RBI submitted its report?
Correct Answer: B. 1926
The Royal Commission on Indian Currency and Finance, also known as the Hilton Young Commission (after its chairman Edward Hilton Young), submitted its report in 1926. It recommended establishing a central bank for India to separate currency management from government control. This led to the drafting of the RBI Act in 1934 and the establishment of RBI in 1935.
Which Governor of RBI served the longest consecutive term?
Correct Answer: C. Shaktikanta Das
Shaktikanta Das served as RBI Governor from December 2018 to December 2024, a six-year tenure, making him one of the longest-serving RBI governors. He guided the Indian economy through the COVID-19 pandemic and multiple economic challenges. Before him, Governors like C.D. Deshmukh (1943-1949) also had notable tenures.
What is the difference between 'nominal' and 'real' interest rates?
Correct Answer: B. Real interest rate = nominal rate - inflation rate
The real interest rate adjusts the nominal (stated) interest rate for inflation: Real Rate = Nominal Rate − Inflation Rate (Fisher Effect). For example, if the repo rate is 6.5% and inflation is 5%, the real rate is 1.5%. The real interest rate matters for investment and borrowing decisions because it reflects the true cost of borrowing in terms of purchasing power.
What does 'inflation expectations' mean in the context of monetary policy?
Correct Answer: B. People's beliefs about future inflation that influence present behaviour
Inflation expectations refer to how households, businesses, and investors anticipate future inflation. These expectations influence wage demands, pricing decisions, and investment behaviour, potentially creating self-fulfilling inflation cycles. RBI's credibility in maintaining the 4% target helps anchor inflation expectations, which reduces the actual effort needed to control inflation.
Which of the following is a liability of the Reserve Bank of India?
Correct Answer: C. Currency notes in circulation
Currency notes in circulation are a liability of the Reserve Bank of India because RBI is obligated to pay equivalent value to note holders. On the other side, the assets backing this liability include gold, foreign securities, and rupee securities. Government securities held by RBI and gold reserves are assets, not liabilities.