Money and Banking (part – II)

Total Questions: 268

51. Which one of the following is not the method of quantitative credit control ? [U.P.P.C.S. (Mains) 2017]

Correct Answer: (d) Rationing of credit
Solution:Among the given options, the first three are the instruments of selective credit control or qualitative credit control measures of the RBI, while last one is an instrument of quantitative credit control measures of the RBI.

Instruments of Monetary Policy Measures of RBI

Quantitative Credit Control Measures Selective/ Qualitative Credit Control Measures 
1. Bank Rate1. Loan regulations by Fixation of Margin Requirements
2. Open Market Operations2. Consumer Credit Regulations
3. Repo Rate3. Issue of Directives
4. Reverse Repo Rate4. Rationing of Credit
5. Marginal Standing Facility5. Moral Suasion and Publicity
6. Variable Cash Reserve Ratios (CRR and SLR)6. Direct Action

52. Open market operations are include in : [U.P.P.C.S. (Mains) 2017]

Correct Answer: (b) Quantitative techniques of credit control
Solution:Among the given options, the first three are the instruments of selective credit control or qualitative credit control measures of the RBI, while last one is an instrument of quantitative credit control measures of the RBI.

Instruments of Monetary Policy Measures of RBI

Quantitative Credit Control Measures Selective/ Qualitative Credit Control Measures 
1. Bank Rate1. Loan regulations by Fixation of Margin Requirements
2. Open Market Operations2. Consumer Credit Regulations
3. Repo Rate3. Issue of Directives
4. Reverse Repo Rate4. Rationing of Credit
5. Marginal Standing Facility5. Moral Suasion and Publicity
6. Variable Cash Reserve Ratios (CRR and SLR)6. Direct Action

53. With reference to Indian economy, consider the following : [U.P.S.C (Pre) 2015]

1. Bank Rate
2. Open marker operations
3. Public debt
4. Public revenue

Which of the above is/are component /components of monetary policy?

Correct Answer: (c) 1 and 2
Solution:Bank Rate and open market operations OMOs are instruments of monetary policy while public debt and public revenue are related to fiscal policy.

Open Market Operations: Buying and selling of bonds issued by the Government in the open market; Entrusted to the Central bank on behalf of the Government. When RBI buys the Government bonds, money supply in the economy increases; When RBI sells the Government bonds, money supply in the economy decreases.
Bank Rate: Rate at which it lends money to commercial banks. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.

54. Open market operations of Reserve Bank of India refer to : [U.P.P.C.S (Pre) 2010, U.P. Lower Sub. (Pre) 2008]

Correct Answer: (a) trading in securities
Solution:The open market operations of the Reserve Bank of India refer to the sale and purchase of government securities and treasury bills by RBI in the open market. The Central Bank use this as primary tool of monetary policy. To increase money supply in the economy, the RBI purchases the government securities and to decrease money supply in the economy, the RBI sells government securities in the market.

There are two types of open market operations:

  • Outright open market operations: Permanent in nature: without any promise from the central bank to buy or sell the bonds back.
  • Repo open market operations: When there is an agreement to sell the purchased bonds by the central bank, the agreement is called Repurchase Agreement or Repo. Central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased; Agreement is called a Reverse Repurchase Agreement or Reverse Repo.

55. In the context of Indian economy, 'open market operations' refers to : [U.P.S.C (Pre) 2013]

Correct Answer: (c) Purchase and sale of government securities by the RBI
Solution:The open market operations of the Reserve Bank of India refer to the sale and purchase of government securities and treasury bills by RBI in the open market. The Central Bank use this as primary tool of monetary policy. To increase money supply in the economy, the RBI purchases the government securities and to decrease money supply in the economy, the RBI sells government securities in the market.

There are two types of open market operations:

  • Outright open market operations: Permanent in nature: without any promise from the central bank to buy or sell the bonds back.
  • Repo open market operations: When there is an agreement to sell the purchased bonds by the central bank, the agreement is called Repurchase Agreement or Repo. Central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased; Agreement is called a Reverse Repurchase Agreement or Reverse Repo.

56. Variable reserve rates and open market operations are the means of : [U.P.S.C (Pre) 1993]

Correct Answer: (b) monetary Policy
Solution:The variable reserve rates and open market operations (OMOs) are important tools of the Central Bank's (RBI) monetary policy and play an essential role in regulating money supply in the economy. Through variable reserve rate RBI controls and regulates the credit flow, while, through Open Market Operations, the RBI buys and sells government securities, in order to regulate the supply of money. Both are the RBI's quantitative measures under the monetary policy to regulate credit control.

57. Which one of the following activities of the Reserve Bank of India is considered to be part of 'Sterilization' ? [U.P.S.C (Pre) 2023]

Correct Answer: (a) Conducting 'Open Market Operations'
Solution:'Sterilization' refers to the process by which the RBI takes away money from the banking system to neutralize the fresh money that enters the system. To ease the threat of currency appreciation or inflation, Central Banks often attempt what is known as the 'sterilization' of capital flows.

In a successful sterilization operation, the domestic component of the monetary base (bank reserve plus currency ) is reduced to offset the reserve inflow, at least temporarily . The classical form of sterilization has been through the use of open market operations, that is, selling Treasury bills and other instruments to reduce the domestic component off the monetary base. Hence , option (a) is the correct answer.

58. Given below are two statements, one labelled as Assertion (A) and other as Reason (R). [U.P.R.O./A.R.O. (Pre) (Re-Exam) 2016]

Ascertain (A) : Under Operation Twist, RBI simultaneously sell short-term securities and buys long-term securities.

Reason (R) :  The main objective of this operation is to promote long-term investment.

Choose the correct answer from the codes given below.

Codes :

Correct Answer: (a) Both (A) and (R) are true and (R) is the correct explanation of (A)
Solution:Simultaneous purchase and sale of government securities by the RBI under open market operations (OMOs) is popularly known as Operation Twist. It involves buying long- term securities while selling short-term securities to keep borrowing costs down.

Operation Twist is a program of quantitative easing used by the RBI that was first introduced by the Federal Reserves in US in 1961. It is aimed at stimulating economic growth through lowering long-term interest rates. The main objective of this operation is to promote long-term investments. Hence, both (A) and (R) are true and (R) is the correct explanation of (A).

59. Which of the following measures would result in an increase in the money supply in the economy ? [U.P.S.C (Pre) 2012]

1. Purchase of government securities from the public by the Central Bank.

2. Deposit of currency in commercial banks by the public.

3. Borrowing by the government from the Central Bank.

4. Sale of government securities to the public by the Central Bank.

Select the correct answer using the codes given below :

Correct Answer: (c) 1 and 3
Solution:When the RBI wants to increase the money supply in the economy, it purchases government securities (under OMOs) from the market. Borrowing by the government from the Central Bank is also a tool to increase the money supply in the economy, while deposit of currency in commercial banks by the public and sale of government securities to the public by the Central Bank will reduce the money supply in the economy . Hence , option (c) is the correct answer.

60. Consider the following measures that RBI uses to control inflation in the economy. [U.P.R.O./A.R.O. (Pre) (Re-Exam) 2016]

  1. Increase Bank Rate
  2.  Increase Cash Reserve Ratio
  3.  Increase Statutory Liquidity Ratio
  4.  Purchase of government securities

Select the correct answer from the codes given below :

Correct Answer: (b) Only 1, 2 and 3
Solution:The steps generally taken by the RBI to tackle inflation includes a rise in Bank Rate and Repo Rate (the rates at which banks borrow from the RBI), a rise in Cash Reserve Ration (CRR) and /or Statutory Liquidity Ratio (SLR) , a reduction in rate of interest on cash deposited by banks with RBI and selling of government securities.

They steps have been taken as monetary instruments by the RBI to control the credit creation and reduce the money supply in the economy in order to tackle the inflation. Purchase of government securities will increase the money supply in the economy .