Monetary Policy & RBI Tools — Set 9

Correct Answer: B. RBI's directive to banks to limit credit to certain sectors/borrowers

Credit rationing is a qualitative monetary policy tool where RBI directs commercial banks to limit or restrict credit to certain sectors, borrower types, or purposes. For example, RBI may direct banks to reduce speculative lending to stock markets or commodity trading. Unlike quantitative tools, credit rationing targets specific credit flows rather than the overall money supply.

Correct Answer: B. Repo Rate at approximately 6.5%

The key policy rate in India is the Repo Rate, which was approximately 6.5% as of 2024. The MPC had raised the repo rate to 6.5% in February 2023 following a series of hikes to control post-pandemic inflation, and it was maintained at that level through much of 2024. The repo rate directly signals the monetary policy stance to financial markets.

Correct Answer: B. Framework for monitoring and correcting weak banks before crises

The correct answer is Framework for monitoring and correcting weak banks before crises. The Prompt Corrective Action (PCA) framework is used by RBI to identify and intervene in banks showing signs of financial stress, based on triggers related to capital adequacy, asset quality, leverage, and profitability. Under PCA, restrictions are placed on a bank's lending, expansion, and dividend payments to restore financial health before a crisis develops. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: C. Contractionary/tightening policy

When an economy faces high inflation, contractionary (or tightening) monetary policy is appropriate. This involves raising the repo rate, increasing CRR, absorbing liquidity through OMO sales, or increasing SLR. These measures reduce money supply, raise borrowing costs, and dampen demand, which helps bring inflation under control.

Correct Answer: B. RBI intervenes in forex markets while neutralising monetary impact through OMO

The correct answer is RBI intervenes in forex markets while neutralising monetary impact through OMO. Sterilised intervention occurs when RBI buys or sells foreign currency in the forex market but simultaneously conducts offsetting OMO transactions to neutralise the effect on domestic money supply. For example, if RBI buys dollars (injecting rupees), it simultaneously sells government securities (absorbing rupees) to maintain the target money supply level. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: C. 20%

Under the RBI Act, the Cash Reserve Ratio (CRR) can be varied between 3% and 20% of Net Demand and Time Liabilities (NDTL). The RBI has full discretion to set CRR within this range. Historically, CRR was as high as 15% in the early 1990s; the current CRR of 4% reflects a much more liberalised monetary environment.

Correct Answer: B. Cutting repo rate and injecting liquidity via TLTRO

During the COVID-19 pandemic (2020-21), the RBI under Governor Shaktikanta Das sharply cut the repo rate from 5.15% to 4% and introduced Targeted Long-Term Repo Operations (TLTRO) to inject liquidity specifically into credit-starved sectors like NBFCs, MFIs, and corporate bonds. Moratorium on loan repayments was also announced to ease borrower stress.

Correct Answer: B. Long-term liquidity injection by RBI targeting specific sectors

The correct answer is Long-term liquidity injection by RBI targeting specific sectors. Targeted Long-Term Repo Operations (TLTRO) were introduced by RBI in 2020 to provide long-term liquidity (1 to 3 years) at the repo rate, specifically to be deployed in credit-starved sectors like corporate bonds, commercial paper, and NBFCs. Unlike regular repos, TLTRO funds had to be invested in specified instruments, ensuring targeted credit flow. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: B. Extent to which RBI rate cuts/hikes are passed on to bank lending rates and borrowers

Transmission refers to how fully and quickly the RBI's repo rate changes are passed through to commercial bank lending and deposit rates, and ultimately to the real economy. Poor transmission — where banks do not fully pass on rate cuts to borrowers — is a chronic challenge in India. The shift to EBLR (External Benchmark Lending Rate) was aimed at improving transmission.

Correct Answer: B. Maintaining price stability while keeping growth in mind

The Monetary Policy Committee (MPC) of the RBI, established under the amended RBI Act 2016, has the primary objective of maintaining price stability while keeping the objective of growth in mind. It sets the policy repo rate to achieve an inflation target of 4% (with a band of +/-2%). The MPC consists of 6 members: 3 from the RBI and 3 external members appointed by the Government of India.