Announcement
Monetary policy/Financial inst/Banking
Assertion (A): The Reserve Bank of India (RBI) increases the Repo Rate to control inflationary pressures in the economy.
Reasoning (R): An increase in the Repo Rate makes borrowing expensive for commercial banks, leading to a reduction in the overall money supply
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: Raising the Repo rate increases the cost of funds for banks, which they pass on to consumers, thereby reducing consumption and cooling inflation.
Assertion (A): The Marginal Standing Facility (MSF) rate is always higher than the Repo Rate.
Reasoning (R): MSF acts as a safety valve for banks to borrow funds overnight from the RBI during severe liquidity crunches by pledging government securities
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: MSF is typically 25 basis points higher than the Repo rate to discourage over-reliance on this window and ensure it is used only in emergencies.
Assertion (A): Statutory Liquidity Ratio (SLR) can be maintained by banks in the form of cash, gold, and unencumbered government securities.
Reasoning (R): SLR is primarily used by the RBI to ensure the solvency of commercial banks and to regulate the flow of credit to the government.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: While both statements are true, the specific forms (gold, cash, G-Secs) are required for liquidity safety; the regulation of credit to the government is a consequence/function of SLR but does not explain why those specific assets are chosen.
Assertion (A): The Monetary Policy Committee (MPC) in India is chaired by the Union Finance Minister.
Reasoning (R): The MPC is a 6-member body responsible for determining the policy interest rate required to achieve the inflation target.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: Assertion is false because the MPC is chaired by the Governor of the RBI, not the Finance Minister. Reasoning is a correct description of the committee.
Assertion (A): Cash Reserve Ratio (CRR) does not earn any interest for commercial banks from the RBI.
Reasoning (R): CRR is a tool used by the RBI to drain excess liquidity from the banking system and ensure banks keep a portion of their deposits as liquid cash.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: CRR is a purely regulatory reserve on which no interest is paid, serving as a direct liquidity control measure.
Assertion (A): An increase in the Reverse Repo Rate usually leads to higher interest rates in the market.
Reasoning (R): Higher Reverse Repo rates incentivize banks to park their excess funds with the RBI instead of lending to the public.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: When banks get higher returns for keeping money with the RBI, they have less incentive to lend to the public, pushing up market interest rates to compensate.
Assertion (A): Non-Banking Financial Companies (NBFCs) cannot accept demand deposits.
Reasoning (R): NBFCs are not part of the payment and settlement system and cannot issue checks drawn on themselves
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: Because they cannot accept demand deposits (like savings/current accounts), they are excluded from the primary payment system and cannot issue checks.
Assertion (A): The RBI acts as the "Lender of Last Resort" for commercial banks.
Reasoning (R): The RBI provides liquidity to banks facing temporary financial difficulties when they cannot raise funds from other sources.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: This function prevents the collapse of the banking system by providing emergency liquidity to solvent but illiquid banks.
Assertion (A): Open Market Operations (OMOs) are used by the RBI to regulate the money supply throughout the year.
Reasoning (R): By selling government securities in the open market, the RBI sucks out liquidity, while buying securities injects liquidity.
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: OMOs are the primary tool for managing long-term liquidity through the purchase and sale of G-Secs.
Assertion (A): Small Finance Banks (SFBs) are required to extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending (PSL).
Reasoning (R): SFBs were established to further financial inclusion by providing banking services to unserved and underserved sections
- A Both A and R are true, and R is the correct explanation of A.
- B Both A and R are true, but R is NOT the correct explanation of A.
- C A is true, but R is false.
- D A is false, but R is true.
Explanation: Unlike regular commercial banks (40%), SFBs have a higher PSL mandate of 75% because their mission is specifically focused on the "small" segments of the economy.
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