20 July 2024

Q1. Consider the following statements:

1. The responsibility of conducting monetary policy is explicitly mandated under the Reserve Bank of India Act, 1934.
2. The primary objective of monetary policy is to maintain price stability without worrying about growth.
3. The flexible inflation targeting framework by RBI has statutory basis.

How many of the above statements is/are correct?

1. a) Only one
2. b) Only two
3. c) All three
4. c) None

Solution: b)

• Statement 2 is incorrect.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

Q2. Which of the following forms the part of assets of any bank?

1. Reserves
2. Loans
3. Deposits

Select the correct answer code:

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

Solution: b)

• Assets are things a firm owns or what a firm can claim from others. In case of a bank, apart from buildings, furniture, etc., its assets are loans given to public.
• Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves.
• Assets = Reserves + Loans
• Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it.

Q3. In India, Internal Debt comprises:

1. Loans raised in the open market
2. Treasury bills issued to State Governments and Commercial Banks.
3. Non-interest bearing rupee securities issued to International Financial Institutions.

How many of the above statements is/are correct?

(a) Only one

(b) Only two

1. c) All three
2. d) None

Solution: c)

• Internal Debt comprises loans raised in the open market, compensation and other bonds, etc. It also includes borrowings through treasury bills including treasury bills issued to State Governments, Commercial Banks and other Investors, as well as non-negotiable, non-interest bearing rupee securities issued to International Financial Institutions

Q4. Consider the following statements regarding RBI’s Open Market Operations (OMOs):

1. OMOs can be used to tame short-term inflation in the economy.
2. They are to be mandatorily conducted once every year to adjust liquidity in the security markets.
3. No intermediaries such as commercial banks are involved in OMOs.

How many of the above statements is/are correct?

1. a) Only one
2. b) Only two
3. c) All three
4. d) None

Solution: a)

• Only statement 1 is correct.
• OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.

Q5. Consider the following statements regarding Concessional finance.

1. Concessional finance is below-market-rate finance provided by major financial institutions, such as development banks and multilateral funds, to developing countries to accelerate development objectives.
2. Concessional finance cannot be in the form of grants or equity investments.
3. Concessional finance targets high-impact projects responding to globally significant development challenges.

How many of the above statements is/are correct?

1. a) Only one
2. b) Only two
3. c) All three
4. c) None

Solution: b)

• Statement 2 is incorrect.
• Concessional finance is below market rate finance provided by major financial institutions, such as development banks and multilateral funds, to developing countries to accelerate development objectives. The term concessional finance does not represent a single mechanism or type of financial support but comprises a range of below market rate products used to accelerate a climate or development objective.
• Concessional finance targets high-impact projects responding to globally significant development challenges – from climate change mitigation and resilience to vaccine deployment, water sanitation and education – that otherwise could not go ahead without specialised financial support.
• The most common financial products used to deliver concessional finance come in the form of loans, grants and, to some extent, equity investments.