Ramesh Singh Test : Banking in India - 1 - UPSC MCQ

1. The first statement is correct. The MPC of India maintained a status quo on the repo rate until January 2022. This indicates that there were no changes to the repo rate until that point.

2. The second statement is correct. The RBI initiated a monetary tightening cycle in April 2022 in response to the headline/retail inflation (CPI-C) surpassing the upper limit of 6% of RBI's tolerance band.

3. The third statement is incorrect. The broader banking consolidation process for Public Sector Banks (PSBs) began in 1993-94, not in 1998. This was in line with the financial reform recommendations of the Narasimham Committee, which had reports in both 1991 and 1998 but the process began earlier.

Therefore, the correct answer is Option B: 1 and 2 Only.

1. Repo rate: Policy rate set by the central bank.

- Correct. The repo rate is indeed a policy rate determined by the central bank (RBI in India) and is used to control inflation and liquidity.

2. 91-day Treasury Bill yield: Long-term government security yield.

- Incorrect. The 91-day Treasury Bill yield represents the yield from a short-term government security, not a long-term one.

3. 182-day Treasury Bill yield: Short-term government security yield.

- Correct. The 182-day Treasury Bill is a short-term government security, and its yield represents the return over this short duration.

4. Basel III norms: Prudential regulatory framework for banks.

- Correct. Basel III norms are international regulatory frameworks developed to strengthen the regulation, supervision, and risk management within the banking sector.

Thus, pairs 1, 3, and 4 are correctly matched, making the correct answer "Option C: Only three pairs."

- Statement 1: NBFCs are not allowed to engage in agricultural, industrial, and construction activities as their principal business. - This statement is correct. NBFCs (Non-Banking Financial Companies) cannot have agricultural, industrial, or construction activities as their principal business. They perform financial intermediation by accepting deposits and providing loans and advances, among other financial activities.

- Statement 2: The Reserve Bank of India was initially set up under private ownership in 1935. - This statement is correct. The Reserve Bank of India (RBI) was established on April 1, 1935, in Calcutta under private ownership in accordance with the provisions of the RBI Act, 1934. It was later nationalized in 1949.

- Statement 3: The primary objective of monetary policy in India is to maintain price stability while promoting growth. - This statement is correct. The primary goal of India's monetary policy is to maintain price stability, which is essential for sustainable growth. The government sets inflation targets, and the RBI plays a significant role in ensuring these targets are met through its monetary policy framework.

All three statements are accurate, making Option D the correct answer.

1. Cash Reserve Ratio (CRR) - Correct. Banks are required to maintain a part of their total deposits with the RBI in cash form.
2. Statutory Liquidity Ratio (SLR) - Incorrect. Banks maintain a part of their total deposits in liquid assets with themselves, not with the RBI.
3. Bank Rate - Incorrect. The Bank Rate is the interest rate charged by the RBI on its long-term lending, not short-term.
4. Repo Rate - Incorrect. The Repo Rate is the rate of interest the RBI charges on short-term borrowings, not long-term.
Only the first pair is correctly matched.

The Market Stabilisation Scheme (MSS), introduced by the RBI in 2004, primarily aims to absorb surplus liquidity arising from large capital inflows. This scheme involves the sale of short-dated government securities and treasury bills to soak up excess liquidity in the system. The mobilized cash is held in a separate government account with the Reserve Bank. By implementing the MSS, the RBI can effectively manage liquidity conditions in the market, especially during times of excess funds influx, ensuring stability and control over the monetary environment.

The Cash Reserve Ratio (CRR) requires banks to maintain a certain percentage of their total deposits with the Reserve Bank of India (RBI) in cash form. This regulation aims to ensure that banks have a proportion of their assets readily available in cash to meet withdrawal demands and to control the liquidity in the economy. By adjusting the CRR, the RBI can influence the lending capacity of banks and thereby impact the overall money supply in the economy.

Base Rate is indeed the minimum interest rate below which banks like Scheduled Commercial Banks (SCBs) will not lend to their customers. This was introduced to bring transparency to lending rates and facilitate the transmission of monetary policy. On the other hand, MCLR (Marginal Cost of funds based Lending Rate) is a different methodology introduced by banks in the financial year 2016-17, not by the RBI. MCLR is a tenor-linked benchmark system that determines the lending rates of banks, not a replacement for the Base Rate system. Therefore, Statement-I is correct while Statement-II is incorrect.

1. Call Money Market: Borrowing and lending of funds on an overnight basis - Correct. The call money market is indeed where borrowing and lending of funds take place on an overnight basis.

2. Open Market Operations: Sale/purchase of private securities to modulate liquidity - Incorrect. Open Market Operations (OMOs) involve the sale/purchase of government securities, not private securities.

3. Liquidity Adjustment Facility: Daily lending or borrowing by the RBI at fixed interest rates - Correct. The Liquidity Adjustment Facility (LAF) allows the RBI to lend or borrow money from the banking system on a daily basis at fixed interest rates.

4. Market Stabilisation Scheme: Absorption of surplus liquidity via sale of short-dated government securities - Correct. The Market Stabilisation Scheme (MSS) absorbs surplus liquidity through the sale of short-dated government securities and treasury bills.

Thus, three out of the four pairs are correctly matched.

Both statements are accurate and interconnected. Statement-I correctly identifies the primary goal of monetary policy, highlighting the importance of maintaining price stability alongside fostering economic growth. Statement-II correctly emphasizes that price stability is a fundamental prerequisite for ensuring sustainable growth. The relationship between these two statements is cohesive, as price stability forms the foundation for sustained economic development by providing a conducive environment for investments and economic activities to flourish. Therefore, both statements are correct, with Statement-II explaining why price stability is crucial for sustainable growth.

All three statements provided are accurate descriptions of the instruments used by the Reserve Bank of India (RBI) in its monetary policy framework:

1. Call Money Market: This market indeed involves the borrowing and lending of funds on an overnight basis among scheduled commercial banks and cooperative banks, excluding regional rural banks and land development banks. This is a correct statement.

2. Liquidity Adjustment Facility (LAF): Introduced in June 2000, the LAF allows the RBI to lend to or borrow money from the banking system at fixed interest rates to manage liquidity and transmit interest rate signals effectively. This statement is also correct.

3. Market Stabilisation Scheme (MSS): Introduced in 2004, the MSS aims to manage surplus liquidity through the sale of short-dated government securities and treasury bills, with the mobilised cash held in a separate government account with the RBI. This is also an accurate statement.

Therefore, all the given statements are correct, making Option D: 1, 2, and 3 the correct answer.