1 A2

Question 1

Open Market Operations refers to:
A) Borrowing by banks from RBI
B) lending by commercial banks to industry and trade
C) purchase and sale of govt securities by the RBI
D) NOTA

Answer 1

C

Question 2

Which of the following measures would result in an increase in the money supply in the economy ?
1) Purchase of government securities from the public by the Central Bank.
2) Deposit of currency in commercial banks by the public.
3) Borrowing by the government from the Central Bank.
4) Sale of government securities to the public by the Central Bank.
Select the correct answer using the codes given below

a) 1 only b) 2 and 4 c) 1 and 3 d) 2, 3 and 4

Answer 2

C) 1 and 3

Question 3

With reference to India economy, consider the following :
Bank rate
Open market operations
Public debt
Public revenue
Which of the above is/are component/components of Monetary Policy?

A) 1 only
B) 2, 3 and 4
C) 1 and 2
D) 1, 3 and 4

Answer 3

C) 1 and 2

Question 4

What does Security mean?

Answer 4

A security means a certificate/document indicating that it’s holder is eligible to receive a certain amount of money at a particular time.

Question 5

The interest rates for corporate bonds depends upon?

Answer 5

• Credit rating of the company: lower credit rating - higher interest rate
• Inflation
• Bank deposit interest rates: higher deposit rates - higher bond interest rates to attract households to shift to corporate bonds
• Yield on G-sec: high G-sec yield -offer higher bond interest rates to attract investment

Question 6

What is bond yield?

Answer 6

Bond yield is the Profit an investor earns on a bond investment

Question 7

Bond yield relation with price

Answer 7

Inversely proportional

Bond value increase - price increases - bond yield decreases

Question 8

Factors affecting bond yield

Answer 8

• When economy is booming - investors sell bonds at lower rates and buy shares so bonds selling price decreases and yield increases
• when there is recession - investors sell shares and buy bonds - bond demand is high so bond selling increases - yield decreases

Question 9

Functions of Monetary Policy Committee

Answer 9

Determine policy rate required to achieve inflation target

Question 10

Synonyms for policy rate

Answer 10

Repo rate, benchmark interest, rate of central bank, policy rate

Question 11

Composition of monetary policy committee (MPC) and its quorum

Answer 11

6 - 3 RBI and 3 Govt members

RBI Gov - ex officio Chairman
Dpty Gov - responsible for monetary policy. Michael Patra (from 2020 Jan)
One person nominated by RBI Central Board, Janak Raj( Executive Director, RBI)

Govt Side
Dr. Chetan Ghate, Indian Statistical Institute
Dr. Pami Dua, Delhi School of Economics
Dr. Ravindra H. Dholakia, IIM-A

Quorum - min 4 including governor

Question 12

What is Operation Twist?

Answer 12

Commercial banks were reluctant to lend money to private companies due to bad loans and non performing assets. Such companies could borrow money by issuing corporate bonds at cheaper interest rates.
RBI starts buying long term G-sec - demand rises and long term G- sec yield falls hence less attractive to park money in G-sec and investors start investing in Corporate bonds

Question 13

What is inverted yield curve? (not under monetary policy)

Answer 13

When the yield of short term bonds is greater than the yield of long term bonds then it is said that the yield curve is inverted

Question 14

What is negative bond yield? (not under monetary policy)

Answer 14

In 2002 Italy changed its currency from Italian Lira to Euro. In 2019, it underwent great political and economic crisis and Italian mutual and pension funds started parking clients money in Germany’s Govt bonds and sold the return at a slightly higher price due to which the investor’s yield was in minus- This is called negative bond yield

Question 15

Monetary Policy: Quantitative tools (SLR, CRR, Repo etc) control - 
Qualitative tools (PSL, LTV etc) control -

Answer 15

Quan - control volume of loans
Qual- control distribution of loans to particular sector of economy(eg: agriculture)/segment of society (eg: farmers, women, SC/ST)

Question 16

Qualitative tools also known as

Answer 16

Selective or Direct tools

Question 17

what are the strategies or ways of making a monetary policy?

Answer 17

1. Exchange Rate Stability - Singapore and other export-oriented economies use this. they want to keep the local currency at a certain rate against US dollar to boost exports.
2. Multiple Indicators- Central Bank tries to focus on Economic growth, employment, inflation control and exchange rate stabilisation. India’s RBI followed this strategy upto 2016
3. Inflation targeting/ Price stability- central bank only aims to control inflation and other factors (economy growth, employment, exchange rate) automatically fall in line. Model successful in Western Nations. RBI’s Urjit Patel Committee Report (2013-14) recommended it for India and it was adopted from Oct-2016 by amending the RBI Act sec 45

Question 18

Tenure of the Monetary Policy Committee members

Answer 18

For RBI members- tenure tied with their ex-officio job tenure.
For Govt members - 4 years, no reappointment

Question 19

Number of meetings legally required to be held in a year by the Monetary Policy committee

Answer 19

4/year
In practice, they meet every two months to decide bi-monthly monetary policy
updates. (Although during Corona-lockdown met more frequently).

Question 20

Monetary Policy Committee decides what?

Answer 20

It decides only the repo rate. Other decisions such as CRR-SLR cut, PSL norms, banning magnetic chip cards etc are decided separately alone by the RBI Governor.

Question 21

During Atmanirbhar Bharat what happened to the policy corridor

Answer 21

reverse repo rate decreased

Question 22

With the fail of RBI’s MCLR, what did they implement?

Answer 22

1. Banks must link their loan interest rates with “External Benchmark + Spread + Risk premium” system.
2. Individual bank free to pick any one External Benchmark such as
   1) RBI repo rate or
   2) 91-day T-bill yield or
   3) 182-day T-bill yield or
   4) any other benchmarks by Financial Benchmarks India Ltd.
3. Banks must feed the latest data of external benchmark in above formula, atleast once every three months.

Question 23

Benefits of Marginal Cost of Funds Lending Rate (MCLR)

Answer 23

Better transmission of monetary policy, transparency and accountability to borrowers

Question 24

Limitations of MCLR system

Answer 24

From January to Oct 2019, RBI has reduced its repo rate by 135 bps but banks reduced their loan interest rates by merely 40-47 bps. Thus, even though the RBI reduces its repo rate, banks are not quickly reducing their loan interest rates.

Question 25

External Benchmark system is applicable for what loans?

Answer 25

new loans given for:
1) Personal loans (taken for any sudden emergency expenditure)
2) retails loans (home, vehicle, electronics etc)
Loans to micro & small enterprises
4) Loans medium enterprises (this 4th category is to be added from 1/April/2020).

Question 26

Limitations of Monetary Policy

Answer 26

1. Repo not a major source of funds for Indian banks due to higher level of savings and deposits (unlike in Western countries)
2. Before the External Benchmark System: Indian Banks did not immediately pass on the RBI rate cuts to customers, citing NPA/Bad loans / profitability problem, hence it took a long time for repo rate cut to benefit end customer.
3. Poor Management in Public Sector Banks (PSB), scams in the private sector banks, large level of Non-Performing Assets (NPA) also stymie the impact of monetary policy.
4. Supple side issues: RBI can’t control poor monsoons or oil price hikes.
5. 6. 7. 8. • refer handout Pg 57-58