Money and Banking (Economic Development) Part-II

Total Questions: 268

81. Which among the following regulates the Repo rate ? [U.P.P.C.S. (Mains) 2002]

Correct Answer: (a) Reserve Bank of India
Solution:
  • The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities.
  • It serves as a primary tool for the RBI to regulate liquidity, control inflation, and influence overall economic activity.
  • By adjusting the repo rate, RBI can either encourage banks to borrow more (by lowering the rate) or discourage borrowing (by raising the rate), thus influencing the money supply in the economy.

Impact of RBI Repo Rate Cut

  • Lower Borrowing Costs: Commercial banks benefit from reduced borrowing costs, enabling them to offer loans at more competitive interest rates.
  • Fixed Deposit (FD) Interest Rates: Banks typically lower FD rates after a repo rate cut, as their own cost of funds decreases. This means new FDs will offer lower returns, while existing FDs remain unaffected until maturity
  • Enhanced Credit Flow: Lower interest rates encourage increased borrowing by businesses and consumers, stimulating investment and consumption.
  • Boost to Real Estate and Infrastructure: Due to more affordable financing options, sectors like real estate and infrastructure may see heightened activity.
  • Support Amid Global Challenges: The RBI's accommodative stance aims to bolster the Indian economy against global uncertainties, such as increased U.S. tariffs impacting exports.

82. The interest rate at which the Reserve Bank of India lends to Commercial banks in the short term to maintain liquidity is known as : [U.P.P.C.S. (Mains) 2008, U.P.P.C.S. (Spl.) (Mains) 2008]

Correct Answer: (d) Repo Rate
Solution:
  • The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities.
  • It serves as a primary tool for the RBI to regulate liquidity, control inflation, and influence overall economic activity.
  • By adjusting the repo rate, RBI can either encourage banks to borrow more (by lowering the rate) or discourage borrowing (by raising the rate), thus influencing the money supply in the economy.

Impact of RBI Repo Rate Cut

  • Lower Borrowing Costs: Commercial banks benefit from reduced borrowing costs, enabling them to offer loans at more competitive interest rates.
  • Fixed Deposit (FD) Interest Rates: Banks typically lower FD rates after a repo rate cut, as their own cost of funds decreases. This means new FDs will offer lower returns, while existing FDs remain unaffected until maturity
  • Enhanced Credit Flow: Lower interest rates encourage increased borrowing by businesses and consumers, stimulating investment and consumption.
  • Boost to Real Estate and Infrastructure: Due to more affordable financing options, sectors like real estate and infrastructure may see heightened activity.
  • Support Amid Global Challenges: The RBI's accommodative stance aims to bolster the Indian economy against global uncertainties, such as increased U.S. tariffs impacting exports.

83. The rate of interest at which Reserve Bank of India lends short term funds to the commercial Banks is known as : [U.P. Lower Sub. (Pre) 2013]

Correct Answer: (a) Repo Rate
Solution:
  • The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities.
  • It serves as a primary tool for the RBI to regulate liquidity, control inflation, and influence overall economic activity.
  • By adjusting the repo rate, RBI can either encourage banks to borrow more (by lowering the rate) or discourage borrowing (by raising the rate), thus influencing the money supply in the economy.

Impact of RBI Repo Rate Cut

  • Lower Borrowing Costs: Commercial banks benefit from reduced borrowing costs, enabling them to offer loans at more competitive interest rates.
  • Fixed Deposit (FD) Interest Rates: Banks typically lower FD rates after a repo rate cut, as their own cost of funds decreases. This means new FDs will offer lower returns, while existing FDs remain unaffected until maturity
  • Enhanced Credit Flow: Lower interest rates encourage increased borrowing by businesses and consumers, stimulating investment and consumption.
  • Boost to Real Estate and Infrastructure: Due to more affordable financing options, sectors like real estate and infrastructure may see heightened activity.
  • Support Amid Global Challenges: The RBI's accommodative stance aims to bolster the Indian economy against global uncertainties, such as increased U.S. tariffs impacting exports.

84. The rate at which banks lend to Reserve Bank of India is known as : [U.P.P.C.S. (Spl.) (Mains) 2008]

Correct Answer: (c) Reverse Repo Rate
Solution:Reverse Repo Rate is the interest rate at which Central Bank (RBI) borrows money from commercial banks for a short term. Through this, the RBI absorbs surplus money from banks against the collateral of eligible government securities on an overnight basis.

The reverse repo rate has an impact on the economy as when the reverse repo rate is increased banks deposit their surplus funds with RBI in order to gain interest.
The result is that the economy experiences reduced money flow, the banks find it more feasible to deposit the money in the central bank rather than providing it to individuals or businesses which results in boosting the value of the rupee.

Similarly, inflation is controlled by RBI by increasing the reverse repo rate, and when the situations are perfect for increasing the inflation, RBI then cuts the reverse repo rate and repo rate so as to inject liquidity into the economy.

The impact of change in reverse repo rate can be seen in home loans, as an increased reverse repo rate will encourage banks to invest their surplus funds in low-risk government securities instead of providing credit to individuals. It causes home loans to become dearer, while the opposite effect is seen when the reverse repo rate is decreased.

85. Consider the following statements : [U.P.S.C (Pre) 2007]

1. The Repo Rate is the rate at which other banks borrow from the Reverse Bank of India.

2. A value of 1 for Gini Coefficient in a country implies that there is perfectly equal income for everyone in its population.

Which of the statements given above is/are correct ?

Correct Answer: (a) 1 only
Solution:Repo (Re-purchase Option) Rate is the rate at which RBI lends to commercial banks and Reverse Repo Rate is the rate at which RBI borrows from commercial banks. In case of inflationary tendencies, RBI can hike the Reverse Repo Rate and absorb the excess liquidity in the market. Similarly, in case there is perceived need to inject liquidity into the system, RBI can reduce the Repo Rate, which will lead to a re- lease of money into the market.

RBI occasionally resorts to the Repo route to fine-tune the liquidity position, without resorting to major policy instruments such as change in CRR and Bank Rate. However, markets are bound to react to frequent changes in the Repo rates and this will be reflected in corresponding changes in the deposit and lending rates of commercial banks. Hence, statement 1 is correct.

A value of 1 for Gini Coefficient in a country implies that there is perfectly unequal income for everyone. Value of 0 for Gini Coefficient shows perfectly equal income. Hence, statement 2 is incorrect.

86. Consider the following statements : [B.P.S.C. (Pre) 2015]

  1. Bank Rate is the rate of interest which RBI charges its clients on their short-term borrowing.
  2. Repo Rate is the rate of interest which RBI charges its clients on their long-term borrowing.

Which of the statements given above is/are incorrect ?

Correct Answer: (c) Both 1 and 2
Solution:Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. In general terms, a bank rate is the interest rate at which nation's Central Bank (RBI) lends money to commercial banks for long term financial requirements . Hence, statement (1) is incorrect. Under Repo Rate, RBI lends money to commercial banks for a short term. Hence, statement (2) is also incorrect. Thus, the option (c) is the correct answer.

87. Inflation rate based on Consumer Price Index increase if : [R.A.S./R.T.S. (Pre) 2016]

Correct Answer: (a) Bank Rate is decreased
Solution:The demand side is important in CPI based inflation. There is a inverse relationship between all four given instruments of monetary policy and inflation. Hence, increase in Repo Rate and SLR ratio will reduce inflation, while decrease in Reverse Repo Rate and Bank Rate will increase the rate of inflation. Therefore, option (a) and (b) both are correct. As per Rajasthan Public Service Commission, option (d) is correct, which is not the right answer.

88. An increase in the Bank Ratee generally indicates that the : [U.P.S.C (Pre) 2013]

Correct Answer: (d) Central Bank is following a tight money policy
Solution:Bank Rate is the rate which the RBI extends credit to commercial banks. The money that commercial banks repay to RBI is the interest amount on the loans. An increase in Bank Rate means hike in commercial banks' borrowing cost , which reduces the supply of money in the market. It means the Central Bank is following a tight (contractionary) money policy. Hence, option (d) is correct.

89. The lowering of Bank Rate by the Reserve Bank of India leads to : [U.P.S.C (Pre) 2011]

Correct Answer: (a) more liquidity in the market
Solution:Bank Rate is the rate at which the RBI lends to the commercial banks. So, when this rate is reduced, banks borrow more and lend more to retail loan seekers and, thus infuse more liquidity in the market.

The interest rate is charged by a nation's central financial authority that controls the money supply in the economy as well as the banking sector. This is usually done quarterly to stabilize inflation and control the country's exchange rates.

When a bank rate changes it triggers a domino effect that influences every sphere of a country's economy. For example prices in the stock market change due to fluctuations in interest rate changes. A change in bank rate affects customers as it affects the rates at which they can take loans

90. Bank Rate implies the rate of interest : [U.P.S.C (Pre) 1995, U.P.P.C.S. (Mains) 2008]

Correct Answer: (d) at which the Reserve Bank of India discounts the Bills of Exchange
Solution:Bank Rate implies the rate of interest at which the RBI discount the Bills of Exchange. In other words, it is the rate of interest at which RBI provides loans to the commercial banks. It is an instrument of monetary policy to influence money supply in the economy.

The interest rate is charged by a nation's central financial authority that controls the money supply in the economy as well as the banking sector. This is usually done quarterly to stabilize inflation and control the country's exchange rates.

When a bank rate changes it triggers a domino effect that influences every sphere of a country's economy. For example prices in the stock market change due to fluctuations in interest rate changes. A change in bank rate affects customers as it affects the rates at which they can take loans