Banking Financial Awareness · Economics

Banking Regulation and Monetary Policy

1,219 Questions

Banking regulation and monetary policy questions test your understanding of the Reserve Bank of India functions, regulatory frameworks, and monetary tools. Topics include KYC guidelines, repo rates, and foreign exchange reserves management. This section is crucial for candidates preparing for banking and financial awareness exams.

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Banking Regulation and Monetary Policy Questions

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

What is/ are the purpose/ purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI?
1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit an interest rates which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.

  1. $1$ only
  2. $2$ only
  3. Both $1$ and $2$
  4. Neither $1$ nor $2$
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The MCLR system was introduced by the RBI to improve the transmission of policy rates into the lending rates of banks. It ensures transparency in the methodology and promotes fair interest rates for both borrowers and the banking system.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

Consider the following statements and select the correct ones using the code given below:
1. RBI takes recourse to open market operations (OMOs) to manage liquidity in the system.
2. In OMOs, RBI generally sells the G-Sec in open market, however, in rare cases it also buys back the same from the market.
3. A 'debt switch' is a method in which RBI buys back G-Secs of short-term maturity and replaces it with G-Secs with longer maturity periods.

  1. 1 nad 2

  2. 2 and 3

  3. 1 and 3

  4. 1,2 and 3
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

OMOs are an effective quantitative policy tool in the armoury of the RBI by which it modulates the liquidity in the system in the short-term. This is a two-way operation-through sell or buy of the G-Secs. The OMOs is constrained by the stock of the G-Secs available with the RBIonce it needs to siphon out money from the market. 

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

Select the correct tools used by the RBI in announcing the monetary policy-use the code given below to select your answer:
1. Term repo rates for 7,14 and 28 days.
2. Bank rate & Marginal standing facility rate.
3. Marginal cost of fund based lending rate.
4. Reverse repo rate for 7,14 and 28 days.

  1. 1 and 2

  2. 2 and 4

  3. 1 and 3

  4. 2 and 3
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Repo rates for more than 1 day are known as the 'term repos' which was launched by the RBI in October 2013 for the first time besidef the one day repo rate (also known as overnight epo rate). 'Marginal cost of fund based lending rate' (MCLR) are announced by the bank. Reverse repo is only for 1 day.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

Select the incorrect statements related to the functions of RBI, using the code given below :
1. The final decision regarding Credit & Monetary Policy is taken by the Union Ministry of Finance.
2. Open Market Operations by the RBI comes under its autonomous powers.
3. Ultimate power of issuing fresh currency notes in India remains with the RBI.
4. RBI has been given full autonomy in the area of regulating the All India Financial Institutions.

  1. 1, 2 and 3

  2. 2, 3 and 4

  3. 1, 3 and 4

  4. 1, 2, 3 and 4
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

RBI avails no autonomy in its functioning-though the Narasimhan Committee-I, in 1991, has suggested to allow it autonomy in the areas of critical importance, similar to many Western economies. It is believed that it has been given a kind of working autonomy in the area of making and announcing the Credit & Monetary Policy (though there is no change in the official stand hitherto).

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

Select the functions of the RBI, which are correct using the code given below:
1. as 'banker to the Government' it performs merchant banking function for the central and the state governments and also acts are their 'banker'.
2. As 'banker to banks', it maintains banking accounts of all scheduled banks.

  1. Only 1

  2. Only 2

  3. 1 and 2

  4. Neither 1 nor 2
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It means the RBI functions as the body, which manage the borrowing programmes of the government in India. Statement-2 talks about the 'banker of the last resort' function of the RBI under which it lends money to all operating banks and the financial institutions in the country.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

In respect of "Door Step Banking", RBI has issued directives under the provisions of _______.

  1. reserve bank of India act, 1934

  2. negotiable instruments act, 1881

  3. banking regulation act, 1949

  4. shops and establishments act
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

 In a bid to facilitate seamless banking for all sections of the society, the Reserve Bank of India directed all banks to implement doorstep banking facilities for differently-abled citizens and those above 70 years of age by December this year under Section 23 of the Banking Regulation Act, 1949.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

In order to encourage investment in the country, the RBI may ____________.

  1. reduce CRR

  2. increase CRR

  3. sell securities in the open market

  4. increase bank rate
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

In order to encourage investment in the country, the RBI may reduce CRR. Reduction in CRR will increase the lending capacity of the banks, leading to higher credit creation which will encourage investment.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

In order to control credit in the country, the RBI may _________________.

  1. buy securities in the open market

  2. sell securities in the open market

  3. reduce CRR

  4. reduce bank rate
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

In order to control credit in the country, the RBI may sell securities in the open market, other options will be useful when expansion of credit is undertaken.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

In India, the Commercial Banks are given license of operation by _________.

  1. The Government of India

  2. The Ministry of Finance

  3. Reserve Bank of India

  4. Banking Companies Regulation Act. 1949
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A commercial bank is that financial institution which  accepts deposit from people and offers loan for the purpose of consumption or investment. In India, the commercial banks are given license of operation by the Reserve bank of India which is an apex bank that controls the entire banking system of India. 

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

In order to control inflation and ensure stability in the money market  _______.

  1. the RBI works under the direction of ministry of finance, government of India

  2. the RBI acts independently and can refuse the government directive

  3. the RBI acts under the board of directors

  4. the RBIs board of governors shall abide by the government directive
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The RBI acts as an independent regulator in matters of monetary policy to ensure price stability. While it coordinates with the government, it has the autonomy to formulate policies to control inflation.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

An agreement, which in fact is a contract, between the RBI and Banks for the sale and repurchase of Govt securities and short-term treasury bills at a future date and for which the RBI indicates "the interest rate", is generally known as the _______________________.

  1. REPO rate

  2. bank Rate

  3. reverse REPO rate

  4. prime lending rate
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is usually conducted for the sale and repurchase of Govt securities and short-term treasury bills at a future date. 

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

Fiat money is introduced by the ___________ of India.

  1. government

  2. state bank

  3. commercial bank

  4. reserve bank
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

ANS. D

Fiat money is a money whose intrinsic value is lower than its face value. Examples of fiat money include coins and bills ( paper currency). Fiat money gets its value from a government order (i.e. fiat). That means, the government declares fiat money to be legal tender, which requires all people and firms within the country to accept it as a means of payment. For example: A 10 Rupee note in India issued by RBI & is signed by the Governer of RBI & is guaranteed by RBI.

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

If RBI infuses fresh money into circulation this will effect _______.

  1. M1

  2. M2

  3. Both

  4. None
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

If Reserve Bank of India(RBI) infuses fresh money into circulation, this will effect M1 and M2 measurement of money supply as they are considered the liquid money supply in the economy and includes currency held by public in terms of coins and paper notes and the demand deposits of the people with the commercial banks. 

Multiple choice instruments of monetary policy and the reserve bank of india money and banking economics

If the county is passing through recession, the RBI would _______.

  1. buy bonds

  2. reduce CRR

  3. ease out bank rate

  4. all or any of the above three
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

If the country would be passing through recession then the Reserve Bank of India(RBI) will use the quantitative measures of their monetary policy in order to control it, which includes: 

(i) Buying bonds in open market: Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By buying the securities and bonds, the central bank releases liquidity in the economy that increases the purchasing power in the economy which controls the situation of recession.  
(ii) Reducing CCR: Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. By decreasing the cash reserve ratio, the commercial banks has to maintain less cash with the central bank which  increases their credit creation capacity and therefore money supply in the economy also increases which corrects the situation of recession.
(iii) Easing out of bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. Bank rate is a quantitative credit control measure under the monetary policy of the government as it controls the overall supply of the money in the economy. During recession, bank rate is decreased to increase the total money supply in the economy by increasing the amount of credit creation by the commercial banks.