Test: Central Banking - 1 - B Com MCQ

The main function of the Reserve Bank of India (RBI) is to formulate and implement monetary policy, regulate and supervise the financial system, and manage foreign exchange. The RBI plays a crucial role in maintaining price stability, ensuring adequate flow of credit, protecting depositors' interests, and promoting the development of the financial system. It acts as the banker to the government and provides various banking services to commercial banks. Overall, the RBI plays a vital role in the Indian economy.

The RBI uses the repo rate as an instrument of monetary policy to control inflation. When the RBI increases the repo rate, it makes borrowing expensive for commercial banks. This encourages banks to lend at higher interest rates, which reduces the availability of money in the economy. By restricting the availability of money, the RBI aims to control inflation. The reverse repo rate, on the other hand, is the rate at which the RBI borrows from commercial banks and can be used to control liquidity in the banking system.

The reverse repo rate is the instrument used by the RBI to absorb excess liquidity from the banking system. In a reverse repo transaction, banks purchase government securities from the RBI and lend money to the central bank. This helps in draining excess liquidity from the banking system. By increasing the reverse repo rate, the RBI makes it more attractive for banks to park their excess funds with the central bank, reducing the availability of money in the economy. This tool is used to control liquidity and manage inflationary pressures.

The Cash Reserve Ratio (CRR) is set by the RBI to regulate the expansion of bank credit. Commercial banks are required to maintain a certain proportion of their deposits in the form of cash with the RBI. By increasing or decreasing the CRR, the RBI can control the amount of money available for lending by commercial banks. When the CRR is increased, banks have to keep a higher proportion of their deposits with the RBI, reducing the amount of money available for lending and restricting credit expansion. On the other hand, a decrease in the CRR increases the availability of money for lending and stimulates credit growth.

The Statutory Liquidity Ratio (SLR) is set by the RBI to regulate the expansion of bank credit. SLR is the minimum percentage of assets, such as gold or government-approved securities, that commercial banks are required to maintain before providing credit to customers. By increasing the SLR, the RBI reduces the flow of credit in the economy as banks have to keep a larger proportion of their deposits in non-cash form. This helps in controlling inflation and ensuring the stability of the financial system.

The Cash Reserve Ratio (CRR) is the instrument used by the RBI to control the availability of money in the economy. Commercial banks are required to maintain a certain proportion of their deposits in the form of cash with the RBI. By increasing or decreasing the CRR, the RBI can regulate the amount of money available for lending by commercial banks. When the CRR is increased, banks have to keep a higher proportion of their deposits with the RBI, reducing the amount of money available for lending. On the other hand, a decrease in the CRR increases the availability of money for lending.

The Marginal Standing Facility (MSF) introduced by the RBI provides a facility for banks to borrow short-term funds against securities. It serves as a mechanism for banks to meet their liquidity mismatches and obtain funds from the RBI. Banks can pledge government securities within the limits of the statutory liquidity ratio (SLR) to avail funds through the MSF. This facility helps in managing liquidity in the banking system and provides a source of short-term funds for banks.

The Reserve Bank of India (RBI) plays a crucial role in managing foreign exchange. It facilitates external trade and payment by ensuring the smooth flow of foreign exchange for imports and exports. The RBI also promotes foreign investment in India by creating a conducive environment for foreign investors and regulating their transactions. Additionally, the RBI is responsible for regulating the exchange rate of the Indian Rupee in the foreign exchange market. Overall, the RBI acts as a manager of foreign exchange to support the country's international trade and investment activities.

Open market operations (OMOs) conducted by the RBI have the purpose of regulating the availability of money in the economy. OMOs involve the purchase and sale of government securities by the RBI in the open market. When the RBI buys government securities, it injects money into the economy, increasing the availability of money. On the other hand, when the RBI sells government securities, it absorbs money from the economy, reducing the availability of money. By conducting OMOs, the RBI can manage liquidity in the banking system and influence interest rates.

The Reserve Bank of India (RBI) acts as a regulator and supervisor of the financial system to ensure stability and confidence in the banking system. It lays out parameters for banking operations, sets standards for risk management, and monitors compliance to protect the interests of depositors. The RBI also aims to provide cost-effective banking services to the public by promoting competition, innovation, and efficiency in the banking sector. Overall, the RBI plays a crucial role in maintaining public confidence in the financial system and safeguarding the interests of depositors.