Ramesh Singh Test : Banking in India - 1 UPSC Indian Economy MCQs & solutions

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, liquidity and growth.

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) was introduced in 2004 to manage excess liquidity in the economy, particularly due to volatile capital inflows.

• Under this scheme, the RBI issues government securities (mainly short-term) on behalf of the Government of India to absorb surplus liquidity.
• The proceeds from these securities are kept in a separate account (not used for government spending), ensuring they don't add to the fiscal deficit.
• MSS is a tool used alongside traditional monetary tools (like repo and CRR) for fine-tuning liquidity and maintaining macroeconomic stability.

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.

• ✅Statement-I is correct: Base Rate is the minimum interest rate set by the Reserve Bank of India (RBI) below which Scheduled Commercial Banks cannot lend to their customers, ensuring transparency and fairness in lending.
• ❌Statement-II is incorrect:  MCLR is the minimum lending rate a bank can offer, not the maximum. It reflects the marginal cost of funds and is used to determine the interest rate for various loans.

The correct answer is C: Statement-I is correct, but 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.

• ✅Statement-I: The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.
  Correct. The Reserve Bank of India (RBI) operates its monetary policy with a dual mandate: maintaining price stability (controlling inflation) and supporting economic growth. This dual mandate is critical for achieving overall economic stability.
• ✅Statement-II: Price stability is a necessary precondition for sustainable growth.
  Correct. Price stability ensures that inflation does not erode purchasing power or create uncertainties in the economy, which are essential for achieving long-term sustainable growth.
• Price stability lays the foundation for sustainable economic growth by reducing inflation-related distortions and encouraging investment. Thus, Statement-II explains why price stability is a key objective of monetary policy.

Therefore,Correct Answer-Option A

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.

1. ❌ Statement 1: Incorrect
   NEER is not adjusted for inflation; it is a weighted average of exchange rates.
2. ✅ Statement 2: Correct
   REER is inflation-adjusted and indicates international competitiveness.
3. ❌ Statement 3: Incorrect
   Currency appreciation makes exports costlier and imports cheaper, not the opposite.

✔️ Correct statement: 2 only → Option B