Questions and Answers
What is the primary purpose of the Standard Deposit Facility Scheme (SDFS)?
Who makes the final decision on the policy interest rates aimed at achieving inflation targets?
How many members are there in the Monetary Policy Committee (MPC) as per the amended RBI Act 1934?
What happens in the event of a tie during an MPC meeting vote?
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How frequently does the Monetary Policy Committee meet?
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What is the primary purpose of the Reverse Repo Rate?
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What is the minimum amount that can be borrowed under the Marginal Standing Facility (MSF)?
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What is one of the qualitative measures used in monetary policy by the RBI?
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Which of the following entities is NOT a borrower under the Bank Rate?
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How does the Marginal Standing Facility (MSF) relate to the Repo Rate?
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What does the Reverse Repo Rate signify?
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What is the range of the Reverse Repo Rate?
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What is the impact of increasing the gap between Repo Rate and MSF?
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Which of the following is a qualitative measure in monetary policy?
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Which instrument is specifically used for long-term lending by the RBI?
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What is the main aim of credit control mechanisms implemented by the RBI?
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Which statement correctly describes the Bank Rate?
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What role does the Cash Reserve Ratio (CRR) play in a bank’s operations?
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Which statement best describes the relationship between SLR and loan availability in the banking industry?
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What is the general range set for the Repo Rate by the RBI?
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Which of the following is NOT a characteristic of market-based instruments of monetary policy?
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Study Notes
Standard Deposit Facility Scheme (SDFS)
- Proposed in the Union Budget of 2018-19, originally suggested by RBI in November 2015.
- Designed to improve RBI's liquidity management, particularly after the 2016 demonetization.
Monetary Policy Committee (MPC)
- Responsible for setting policy interest rates to meet inflation targets.
- Comprises 6 members appointed by the central government under Section 45ZB of the amended RBI Act, 1934.
- Meets at least four times a year with a quorum of four members.
- Each member has one vote; the governor has a casting vote in case of tied votes.
- Resolutions from meetings are published, along with a Monetary Policy Report every six months.
Reverse Repo Rate
- Functions as the opposite of the repo rate, part of the Liquidity Adjustment Facility (LAF) initiated in November 1966.
- Used by RBI to control excessive money supply and encourage lower loan disbursal.
- Current reverse repo rate ranges from 5% to 9%.
Marginal Standing Facility (MSF)
- Allows banks to borrow overnight up to 1% of their Net Demand and Time Liabilities (NDTL) from RBI, at an interest rate 1% higher than the repo rate.
- The gap between the Repo Rate and MSF is 3% to support the rupee's strength.
- Minimum borrowing amount set at INR 1 crore, with MSF rates ranging from 6% to 10%.
Bank Rate
- The interest rate charged by RBI on long-term loans to various entities, including governments and financial institutions.
- Bank rate is currently fixed between 5% to 7%.
Qualitative Measures
- These measures focus on the financial system, managing money flow rather than controlling volume.
- Examples include Margin Requirement and other non-market-oriented instruments.
Margin Requirement
- A tool used by RBI to protect banks from losses by providing loans that are less than the bank's requirements.
- Focuses on the balance sheets of commercial banks and includes credit ceilings.
Cash Reserve Ratio (CRR)
- Represents the average daily balance that banks must maintain with RBI, constituting a percentage of their NDTL.
- The RBI regularly adjusts the CRR percentage based on monetary policy needs.
Statutory Liquidity Ratio (SLR)
- The portion of NDTL that banks are required to hold in safe and liquid assets, such as government securities, cash, and gold.
- Changes in SLR impact the resources banks have available for extending loans to the private sector.
Repo Rate
- The interest rate at which RBI lends to commercial banks for short-term borrowing, often viewed as a discount on government securities.
- Current repo rate ranges from 5% to 9%.
Reverse Repo Rate
- The interest rate that RBI pays to banks that lend short-term funds to it.
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Description
This quiz covers essential features of the Reserve Bank of India's Monetary Policy, including the Standard Deposit Facility Scheme, the Monetary Policy Committee, and the Reverse Repo Rate. Enhance your understanding of how these tools help manage liquidity and maintain economic stability in India.
