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Consider the following statements:
Monetary Policy Committee (MPC) decides Repo rate, Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).
Repo Rate is the rate at which the RBI lends money to commercial banks by purchasing securities.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements: Monetary Policy Committee (MPC) ...
The correct answer is option 'B': 2 only.
Explanation:
The given statements are related to the functions and responsibilities of the Monetary Policy Committee (MPC) and the Repo Rate. Let's analyze each statement individually:
Statement 1: Monetary Policy Committee (MPC) decides Repo rate, Statutory Liquidity Ratio (SLR), and Cash Reserve Ratio (CRR).
This statement is incorrect. The Monetary Policy Committee (MPC) is responsible for determining the policy interest rate, which is known as the Repo Rate. The Repo Rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks by purchasing securities. However, the MPC does not have the authority to decide the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). The SLR is determined by the RBI, and it specifies the percentage of total deposits that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities. Similarly, the CRR is also determined by the RBI, and it specifies the percentage of total deposits that banks are required to keep as reserves with the central bank.
Statement 2: Repo Rate is the rate at which the RBI lends money to commercial banks by purchasing securities.
This statement is correct. The Repo Rate is the rate at which the RBI provides short-term liquidity to commercial banks by purchasing government securities from them. When the RBI reduces the Repo Rate, it makes borrowing cheaper for commercial banks. This, in turn, encourages banks to borrow more from the RBI to meet their liquidity requirements. Conversely, when the RBI increases the Repo Rate, it becomes more expensive for banks to borrow from the RBI, which can help in controlling inflation by reducing the money supply in the economy.
In conclusion, only statement 2 is correct. The MPC determines the Repo Rate, but it does not have the authority to decide the SLR and CRR.
Explanation:
The given statements are related to the functions and responsibilities of the Monetary Policy Committee (MPC) and the Repo Rate. Let's analyze each statement individually:
Statement 1: Monetary Policy Committee (MPC) decides Repo rate, Statutory Liquidity Ratio (SLR), and Cash Reserve Ratio (CRR).
This statement is incorrect. The Monetary Policy Committee (MPC) is responsible for determining the policy interest rate, which is known as the Repo Rate. The Repo Rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks by purchasing securities. However, the MPC does not have the authority to decide the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). The SLR is determined by the RBI, and it specifies the percentage of total deposits that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities. Similarly, the CRR is also determined by the RBI, and it specifies the percentage of total deposits that banks are required to keep as reserves with the central bank.
Statement 2: Repo Rate is the rate at which the RBI lends money to commercial banks by purchasing securities.
This statement is correct. The Repo Rate is the rate at which the RBI provides short-term liquidity to commercial banks by purchasing government securities from them. When the RBI reduces the Repo Rate, it makes borrowing cheaper for commercial banks. This, in turn, encourages banks to borrow more from the RBI to meet their liquidity requirements. Conversely, when the RBI increases the Repo Rate, it becomes more expensive for banks to borrow from the RBI, which can help in controlling inflation by reducing the money supply in the economy.
In conclusion, only statement 2 is correct. The MPC determines the Repo Rate, but it does not have the authority to decide the SLR and CRR.
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Community Answer
Consider the following statements: Monetary Policy Committee (MPC) ...
- Under the Reserve Bank of India, Act,1934 (RBI Act,1934) (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind the objective of growth. There are several direct and indirect instruments that are used for implementing monetary policy.
- Repo Rate: The interest rate at which the Reserve Bank provides liquidity under the liquidity adjustment facility (LAF) to all LAF participants against the collateral of government and other approved securities. Repo rate is directly linked to loan rates offered by lenders so an increase in the repo will increase the borrowing cost and vice-versa. The Monetary Policy Committee decides repo rate. Hence, statement 1 is not correct.
- In the last meeting for the current fiscal (2022-23), the Monetary Policy Committee (MPC) projected the real GDP growth at 6.4% (for FY 23-24). Repo Rate is the rate at which the RBI lends money to commercial banks by purchasing securities. Hence, statement 2 is correct.
- Reserve Bank of India has prescribed statutory returns i.e., Form A Return (for CRR) under Section 42(2) of the Reserve Bank of India (RBI) Act, 1934 and Form VIII Return (for SLR) under Section 24 of the Banking Regulation Act, 1949. Both SLR and CRR decided by the parliament and RBI and not by MPC.
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Consider the following statements: Monetary Policy Committee (MPC) decides Repo rate, Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Repo Rate is the rate at which the RBI lends money to commercial banks by purchasing securities. Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'B'. Can you explain this answer?
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