Banking Financial Awareness · Economics

Banking Regulation and Monetary Policy

1,180 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

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. 

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.