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

If RBI wants to decrease the money supply in order to check inflation it will __________.

  1. sell bonds

  2. increase CRR

  3. hike bank rate

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

If Reserve Bank of India wants to decrease the money supply in order to check inflation then they will use the quantitative measures of their monetary policy which includes: 

(i) Selling 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 selling the securities and bonds, the central bank soaks liquidity from the economy that reduces the purchasing power in the economy which controls the situation of inflation.  
(ii) Increase in 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 increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which  reduces their credit creation capacity and therefore money supply in the economy also reduces which corrects the situation of inflation.
(iii) Hiking 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 inflation, bank rate is increased to reduce the total money supply in the economy by reducing the amount of credit creation by the commercial banks. 

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

If RBI sucks excess 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) sucks excess 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

As per RBI (Amendment) Act 1962, RBI is to determine the CRR for commercial banks between ________ to ________ of aggregate deposits and time liabilities.

  1. $3\%$, $10\%$
  2. $5\%$, $10\%$
  3. $3\%$, $15\%$
  4. $4\%$, $12\%$
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The RBI (Amendment) Act, 1962, empowers the RBI to fix the Cash Reserve Ratio (CRR) for banks within a range of 3% to 15% of their net demand and time liabilities.

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

Foreign currency reserves of the country are held by ______.

  1. SBI

  2. CBI

  3. UTI

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

Reserve Bank of India(RBI) is the central bank in India as it is an apex bank that regulates and controls the entire banking system of a country. The Reserve Bank of India(RBI) maintains a minimum reserve of international currency all the time in order to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments. Therefore, foreign currency reserves of the country are held by RBI. 

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

When the RBI makes open market operations by sale of securities the money supply in the banking system?

  1. Reduces

  2. Increases

  3. Is not affected at all

  4. Difficult to say anything
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy which reduces the money supply in the economy. 

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

Which of the following measure is/are adopted for monetary policy in India?

  1. Quantitative Measures

  2. Qualitative Measures

  3. Both (A) and (B)

  4. Neither (A) nor (B)
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Monetary policy measures are broadly classified into quantitative measures (like CRR, SLR, Repo) and qualitative measures (like credit rationing, moral suasion).

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

________ is the official minimum rate at which the Central Bank of a country is prepared to rediscount approved bill held by Commercial Banks.

  1. Repo rate

  2. Reverse repo rate

  3. Discount rate

  4. Bank rate
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The Bank Rate is the official minimum rate at which the central bank is prepared to rediscount or buy bills of exchange or other commercial paper eligible for purchase under the Act.

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

Sale of Government Securities by RBI constitutes _________ of controlling Inflation.

  1. Monetary Measures

  2. Fiscal Measures

  3. Controlling Investments Method

  4. None of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Open Market Operations, such as the sale of government securities by the RBI, are a key tool of monetary policy used to manage liquidity and control inflation.