Test: Bank Rates and Monetary Policy - Bank Exams MCQ

Indian Depository Receipt is a financial instrument denominated in Indian Rupees in the form of a depository receipt. The IDR is a specific Indian version of the similar global depository receipts. It is created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. The foreign company IDRs deposit shares to an Indian depository. The depository issues receipts to Indian investors against these shares. The benefit of the underlying shares (like bonus, dividends, etc.) accrues to the depository receipt holders in India.

Reverse repo means absorption of liquidity from the market by sale of government securities.

'Sub-prime' refers to lending done by financing institutions including banks to customers not meeting with normally required credit appraisal standards. In this type of lending, loans are given to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks, such as unemployment, divorce, medical emergencies, etc. These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk.

Cost push inflation is the inflation caused by an increase in price of inputs like labour, raw material etc. The increased price of the factors of production leads to a decreased supply of these goods.
Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. This is commonly described as "too much money chasing too few goods".
Open and suppressed are the conditions and not the types of inflation.

Dated Government securities or Government bonds are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value. The tenor of dated securities can be up to 30 years.

Bank rate refers to the interest rate charged by the central bank on loans granted to commercial banks. When Bank Rate is increased by RBI, a bank's borrowing cost increases which in return, reduces the supply of money in the market, and makes the loan more costlier.

An upward revision in Bank Rate leads to increase in PLR, thereby adversely impacting the amount payable by borrowers on account of increase in lending rate. Hence, EMI increases.

Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term.
Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors. It is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank.

Raising the interest rates tends to encourage saving because people get better returns on their deposits. On the other hand, raising interest rates on loans acts as a dampening factor. Both of these are conducive to reduction in money supply. When interest rates will be higher people will borrow less. So, it will It discourage borrowing.

Flexibility in operation is desired. Hence, 'rigidity in operation so as to ensure autonomy, easing of competition' is the correct option.