Monetary Tools and Policies MCQ Quiz - Objective Question with Answer for Monetary Tools and Policies - Download Free PDF

The correct answer is the reverse repo rate.

• The rate at which the Reserve Bank of India takes loans from other banks is called the reverse repo rate.

Key Points

• Reverse Repo Rate:
  • It is the rate, at which banks park short-term excess liquidity with the RBI.
  • The current reverse repo rate is 3.35%

Additional Information

• Bank Rate:
  • It is also called the rediscount rate.
  • It is the rate, at which the RBI gives finance to commercial banks.
• Cash Reserve Ratio (CRR):
  • The RBI (Amendment) Bill, 2006, empowers RBI to prescribe CRR–Cash that banks deposit with the RBI without any floor rate or ceiling rate.
  • The current CRR rate is 4.5%.
• Statutory Liquidity Ratio (SLR):
  • It is the ratio of liquid assets, which all commercial banks have to keep in the form of cash, gold, and unencumbered approved securities equal to not more than 40% of their total demand and time deposit liabilities (ranges is 25‑40%).
  • The current SLR is 18.00%.
• ​Repo Rate:
  • It is the rate, at which RBI lends short-term money to the bank against securities.
• Open Market Operations (OMOs):
  • Under OMOs, the RBI sells G-securities in the market.

The correct answer is Buying and selling of bonds issued by the Government in the open market.

Key Points

• Open Market Operations (OMO) is conducted by the Reserve Bank of India (RBI) for the sale or purchase of government securities (g-secs), financial assets or bonds issued by the government to the banks in order to adjust the money supply.
  • The RBI does this to regulate the liquidity from the system and to infuse liquidity into the system.
• There are two types of Open Market Operations: Outright Purchase and Repurchase Agreement. Hence option 1 is correct.
  • Outright Purchase or PEMO is a permanent transaction which involves the RBI selling or purchasing securities in the open market to regulate the money supply.
  • A Repurchase Agreement is a short-term agreement that involves the RBI buying and purchasing government securities after a specified date.​

Additional Information

• Open Market Operations are flexible and easily reversible thereby reducing the lags of monetary policy.
• In 1948, the RBI mentioned the OMO purchase for the first time in its Annual Report.
• Government securities or G-Secs are tradable instruments issued by central governments and state governments.
• They are risk-free instruments and can be short-term like Treasury bills (T-bills) with a maturity of less than a year or long-term like government bonds with a maturity of a year or more than a year.

The correct answer is It is the re-discounting rate that RBI extends to banks against securities.

Key Points

• The Bank Rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks or financial institutions in exchange for securities.
• It is used by the RBI as a tool to control liquidity and inflation in the economy.
• When the RBI increases the Bank Rate, borrowing becomes more expensive for banks, which reduces the money supply in the economy.
• Conversely, when the Bank Rate is reduced, borrowing becomes cheaper, which increases the money supply in the economy.

Important Points

• The Bank Rate is distinct from the Repo Rate, which is a short-term lending tool used by the RBI.
• The Bank Rate does not involve any collateral, whereas the Repo Rate involves the purchase and resale of government securities.

Additional Information

• Option 1: It is the rate of interest charged by banks against their loans.
  • This refers to the interest rate that banks charge their customers for borrowing funds, which is different from the Bank Rate.
  • This rate is determined by banks based on their cost of funds, operating costs, and profit margins.
• Option 2: It is the rate of interest given by banks against the deposits received.
  • This is known as the deposit rate or savings interest rate, which is paid by banks to depositors for the money they keep in savings or fixed deposit accounts.
  • It is not related to the Bank Rate set by the RBI.
• Option 3: It is the portion of the deposits that banks are required to maintain with the RBI.
  • This refers to the Cash Reserve Ratio (CRR), which is a mandatory reserve requirement that banks must maintain with the RBI.
  • The CRR is expressed as a percentage of a bank's net demand and time liabilities (NDTL).
• Option 5: (Empty)
  • This option is invalid as it does not provide any information.

The correct answer is Option 1

Key Points

• Bank Rate: The Reserve Bank of India (RBI) uses the bank rate as an instrument to control credit and regulate the economy. By increasing or decreasing the bank rate, the RBI influences the cost of borrowing for commercial banks, which impacts credit availability in the economy.
• Variable Reserve Requirements (CRR & SLR): The RBI mandates commercial banks to maintain a certain percentage of their deposits with the RBI (CRR) and invest a portion in government-approved securities (SLR). By modifying these percentages, the RBI can control the liquidity in the banking system.
• Open Market Operations (OMO): The RBI buys or sells government securities in the open market to regulate the liquidity in the financial system. Selling securities reduces liquidity, while purchasing securities increases it.
• All three instruments (Bank Rate, CRR & SLR, and Open Market Operations) are major tools employed by the RBI to control credit and manage the economy effectively.

Additional Information

• Bank Rate: The bank rate is the rate at which the central bank lends money to commercial banks without any collateral. Changes in the bank rate impact interest rates in the economy, influencing borrowing and spending behavior.
• Cash Reserve Ratio (CRR): CRR is the percentage of a bank's total deposits that must be maintained as reserves in the form of cash with the central bank. An increase in CRR reduces the funds available for lending, while a decrease increases liquidity in the market.
• Statutory Liquidity Ratio (SLR): SLR is the minimum percentage of net demand and time liabilities (NDTL) that a bank must maintain in the form of liquid assets such as cash, gold, or approved government securities. Adjusting SLR helps the RBI manage inflation and credit growth.
• Open Market Operations (OMO): OMOs are market operations conducted by the RBI to manage liquidity. By selling government securities, the RBI reduces liquidity, while buying securities increases liquidity in the economy.
• Credit Control: Credit control measures are employed by the RBI to ensure that credit flow in the economy is consistent with economic growth objectives and does not lead to inflationary pressures.

The correct answer is RBI.

Key Points

• The Reserve Bank of India (RBI) is the central bank of India, responsible for formulating, implementing, and monitoring the country's monetary policy.
• It was established on 1st April 1935 under the Reserve Bank of India Act, 1934, and was nationalized in 1949.
• The RBI's monetary policy aims to achieve key objectives such as controlling inflation, ensuring economic growth, and maintaining financial stability.
• The central bank uses tools like repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to regulate money supply and liquidity in the economy.
• The Monetary Policy Committee (MPC), constituted under the RBI Act, 1934, is responsible for setting the policy interest rates to achieve inflation targets.

Additional Information

• Monetary Policy:
  • Monetary policy refers to the process by which a central bank manages money supply and interest rates to achieve specific economic objectives like controlling inflation and boosting growth.
  • It can be categorized into two types: expansionary policy (to stimulate the economy) and contractionary policy (to control inflation).
• Key Monetary Policy Tools:
  • Repo Rate: The rate at which RBI lends money to commercial banks. A reduction in the repo rate boosts borrowing and investment.
  • Reverse Repo Rate: The rate at which RBI borrows money from banks, helping to absorb excess liquidity.
  • CRR: Cash Reserve Ratio is the percentage of a bank's total deposits that must be kept in reserve with the RBI.
  • SLR: Statutory Liquidity Ratio is the percentage of net demand and time liabilities that banks must maintain in the form of gold, cash, or government-approved securities.
• Monetary Policy Committee (MPC):
  • The MPC is a six-member committee tasked with deciding the policy interest rates to achieve inflation targets.
  • It comprises three RBI officials and three external members appointed by the government.
  • The current inflation target (as of 2023) is 4% ± 2%.
• Other Functions of RBI:
  • It acts as the issuer of currency in India.
  • Manages the country's foreign exchange reserves.
  • Acts as the banker to the government and commercial banks.
  • Ensures the regulation and supervision of banks and non-banking financial institutions (NBFCs).

The correct answer is RBI.

• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy.
• The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.

The correct answer is Reverse Repo Rate.

Key Points

• The Reverse Repo Rate is the interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral of eligible government securities under the LAF.
• It refers to the rate at which the central bank borrows money from commercial banks.
• When there is inflation government Increases the reverse repo rate to reduce the money supply and vice versa in case of deflation.
• It is one of the quantitative instruments of the central bank.
• It should always be kept in mind that, the reverse repo rate is always fixed below the repo rate.

Additional Information

The correct answer is Reserve Bank of India.

Key Points

• Bank Rate refers to the official interest rate at which RBI will provide loans to the banking system.
• Bank rate is used as a signal by the RBi to the commercial banks on RBI's thinking about what the interest rate should be.

Important Points

Monetary Tools of RBI:

Additional Information

The correct answer is the reverse repo rate.

• The rate at which the Reserve Bank of India takes loans from other banks is called the reverse repo rate.

Key Points

• Reverse Repo Rate:
  • It is the rate, at which banks park short-term excess liquidity with the RBI.
  • The current reverse repo rate is 3.35%

Additional Information

• Bank Rate:
  • It is also called the rediscount rate.
  • It is the rate, at which the RBI gives finance to commercial banks.
• Cash Reserve Ratio (CRR):
  • The RBI (Amendment) Bill, 2006, empowers RBI to prescribe CRR–Cash that banks deposit with the RBI without any floor rate or ceiling rate.
  • The current CRR rate is 4.5%.
• Statutory Liquidity Ratio (SLR):
  • It is the ratio of liquid assets, which all commercial banks have to keep in the form of cash, gold, and unencumbered approved securities equal to not more than 40% of their total demand and time deposit liabilities (ranges is 25‑40%).
  • The current SLR is 18.00%.
• ​Repo Rate:
  • It is the rate, at which RBI lends short-term money to the bank against securities.
• Open Market Operations (OMOs):
  • Under OMOs, the RBI sells G-securities in the market.

The correct answer is Repo Rate.

Key Points

• Repo Rate is the rate at which the Reserve Bank Of India lends money to commercial banks in India if they face a scarcity of funds.
• Current Repo Rate: 6.50 %.
• It is a rate on short-term, collateral-backed borrowing.
• The Repo rate is used by monetary authorities to control inflation.

Reverse Repo Rate

• It is the rate at which the Reverse Bank of India borrows funds from commercial banks.
• It is the rate at which commercial banks in India deposit their excess money with the Reserve Bank of India usually for the short term.
• Current Reverse Repo Rate: 3.35%.

Sovereign Rate

• It is similar to the corporate bond credit ratings.
• It is based upon an assessment of both the ability and willingness of a country to service its debt.

Prime Lending Rate

• It is an interest rate used by the banks at which banks lend to customers with good credit.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in the case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Thus, option 3 is the correct answer.

Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit from it by receiving interest for their holdings with the central bank.

During high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers.

The correct answer is 1996.

Key Points

• In 1996, the Government of India set up a Disinvestment Commission under the Ministry of Industries.
• The mandate of the commission was to assess the viability and advice the Government on disinvesting various PSE's through market development and diversifying transfer of ownership of the PSU's for five-ten years period.
• Ministry of Industry (Department of Public Enterprises) vide a resolution dated 23 August 1996, constituted a Public Sector Disinvestment Commission for a period of three years under Shri G.V. Ramakrishna along with four other members.
• The term was further extended till 30 November 1999.
• The Commission submitted reports on 58 PSEs. 

The correct answer is Budget expenditure- Budget receipts excluding borrowings.

Key Points

• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. While calculating the total revenue, borrowings are not included. Hence, Fiscal Deficit is- Budget expenditure- Budget receipts excluding borrowings.
  • A fiscal deficit situation occurs when the government’s expenditure exceeds its income. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country. A recurring high fiscal deficit means that the government has been spending beyond its means.
  • The government describes fiscal deficit of India as “the excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”.

Important Points

• What constitutes the government’s total income or receipts?
  • It has two components revenue receipts and non-tax revenues.
    • Revenue receipts of the government
      • Corporation Tax
      • Income Tax
      • Custom Duties
      • Union Excise Duties
      • GST and taxes of Union territories.
    • Non-tax revenues
      • Interest Receipts
      • Dividends and Profits
      • External Grants
      • Other non-tax revenues
      • Receipts of union territories
• Expenditures of the government:
  • Revenue Expenditure
  • Capital Expenditure
  • Interest Payments
  • Grants-in-aid for creation of capital assets

Key Points

• Fiscal Deficit formula: 
  • Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)
  • If the total expenditure of the government exceeds its total revenue and non-revenue receipts in a financial year, then that gap is the fiscal deficit for the financial year. 
  • The government meets fiscal deficit by borrowing money. In a way, the total borrowing requirements of the government in a financial year is equal to the fiscal deficit in that year. 

The correct answer is Open Market Operations.

Key Points

• Open market operations (OMO) refer to a central bank's buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.
• Securities purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• OMO is one of the tools that RBI uses to smoothen the liquidity conditions throughout the year and minimize its impact on the interest rate and inflation rate levels.

Additional Information

• RBI was founded on 1 April 1935, in Kolkata.
  • HQ in Mumbai.
  • Present Governor is Sanjay Malhotra.
  • The RBI is responsible for implementing monetary and credit policies, issuing currency notes, being a banker to the government, a regulator of the banking system, manager of foreign exchange, and regulator of payment & settlement systems while continuously working towards the development of Indian financial markets.
  • RBI is not a Commercial Bank.
  • RBI was nationalized on 1st January 1949.

The correct answer is ₹2,00,000.

Key Points

• Rs. 2,00,000 is the minimum amount that can be remitted through Real Time Gross Settlement (RTGS).
• The acronym "RTGS" stands for Real-Time Gross Settlement, which can be described as a mechanism where fund transfers are settled continuously and in real-time, individually on a transaction basis (without netting).
• "Real-Time" means the delivery of instructions at the time of receipt; "Gross Settlement" means the settlement of instructions for the transfer of funds happens separately.
• The RTGS system is intended specifically for large-value transactions.