Day-753 | Daily MCQs | UPSC Prelims | ECONOMY

Answer. (B)
Explanation:
● Statement 1 is correct: A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments. G-Secs are known as risk-free gilt-edged products since they have almost no default risk because they are issued by the Government only.
● Statement 2 is correct: G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the electronic platform known as the E-Kuber. E-Kuber is the core banking solution platform of RBI. So, basically, e-Kuber is a platform where the primary market transaction happens.
● Statement 3 is incorrect: Government securities can be bought and sold by any person, not only by the banks.

Answer. (A)
Explanation:
● In 2010, the Government of India, in consultation with RBI, introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The Cash Management Bills (CMBs) have the generic character of T-bills but are issued for maturities of less than 91 days.
● Statement A is incorrect: Cash Management Bills are issued by the Government of India only.

Answer. (B)
Explanation:
Bond prices are inversely related to interest rates.
● Statement 1 is correct: When Inflation rises in an economy, It leads to a rise in the interest rates of the banks.
● Statement 2 is incorrect: As a result, the prices of bonds decrease in the economy.
● Statement 3 is correct: When bond price decreases, it ultimately leads to an increase in bond yield.
For example, Suppose the original price of the bond is 100, and it is giving interest 10% per year.
If the banks increase their interest rate to 12% due to changes in the economic conditions, then the people holding the “bonds” will try to get rid of the bonds as the bond is offering them just a 10% interest rate. But if they would go into the market to sell the bond, nobody would be willing to purchase these bonds in the market at Rs. 100 because why would anybody purchase the slips at 10% interest rate if they can deposit Rs. 100 in banks and can earn 12% interest rate. So, the bondholders will offer the bond at a discounted price if they want it to be sold in the market. It means that bond prices will decrease. And when bond prices decrease, the yield of the bond increases.

Answer. (B)
Explanation:
The RBI releases data for four different money supply indicators. They are as follows:
M1 = Currency with the public + Demand deposits of the public with banks
M2 = M1 + Savings Deposits with Post Office Savings Bank
M3 = M1 + Time deposits of the public with banks
M4 = M3 + Total deposits with Post Office Savings Bank
M1 is the most liquid measure of money supply, and M4 is the least liquid measure of money supply.
● Statement 1 is correct: M1 and M2 are called narrow money, and M3 and M4 are called broad money.
● Statement 2 is Incorrect: The numbering from M1 to M4 is in decreasing order of liquidity.
● Statement 3 is correct: M3 is the most commonly used measure of money supply and is also called “aggregate monetary resources”.

Answer: (B)
Explanation:
● Deposits are the amounts deposited by the customers into their accounts; they are considered liabilities of the banks.
● Loans and advances are the amounts transferred by banks to the borrowers and for which borrowers are liable to pay interest, and for banks, they are considered assets of the Bank.
● Borrowings by the Bank are their liabilities. Banks borrow from RBI or other banks from time to time to fulfil their legal requirements.
● Investment in government securities are the assets for the banks.

Answer: (B)
Explanation:
● Statement B is correct: Assets are a person’s or firm’s ownership rights on something. A person can claim such a thing at any time. It has certain current or future economic value.
● The International Financial Reporting Standards (IFRS) defines an asset as “a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”
● An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets also include the long-term investments made by a person to receive interest or dividends from it.
● Assets are reported on a company’s balance sheet. They’re classified as current, fixed, financial, and intangible. They are bought or created to increase a firm’s value or benefit the firm’s operations.
● An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent.
● A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.

Answer: (C)
Explanation:
Monetary policy is the measures taken by the Central Bank of the country to control the liquidity in the economy, for price stability, Inflation targeting and for accelerating growth in the economy. Monetary policy refers to the actions taken by the central bank of a country to influence the supply of money ,credit in the economy and the interest rates.
RBI uses both quantitative and qualitative tools to achieve these objectives. There are several components/tools of Monetary policy to achieve these objectives, which include Liquidity adjustment facility, standing deposit facility, Bank rate, Reserve ratios, intervention in the forex market, moral suasion, etc.
A foreign exchange intervention is a monetary policy tool that involves a central bank taking an active, participatory role in influencing the monetary funds transfer rate of the national currency, usually with its own reserves or its own authority to generate the currency. The central bank buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the exchange rate and trade policy.
Public Debt means the Debt of the Government, which includes both internal and external debts. It is not a component of Monetary policy.

Answer: (B)
Explanation:
● Statement 1 is incorrect: The expansionary monetary policy was adopted by RBI to increase the flow of cash in the economy. During the inflation situation, the economy already has more money chasing less commodities. In such a situation, adopting an expansionary policy will backfire and lead to a price increase.
● Statement 2 is correct: If an economy is facing a crisis situation with low or no growth, expansionary policy can be used as a tool to revive the growth trajectory. e.g. During the Covid crisis, a stimulus package in the form of Atma Nirbhar Bharat.
● Statement 3 is correct: Contractionary policy is used to control prices by taking out money from the market.

Answer. (D)
Explanation:
● Statement 1 is correct: Money multiplier is the amount of money created by the banks from the deposits made by the people. For, if a total of 1 lakh rupees is deposited into the Bank, such deposited amount can be used by banks in lending money and earning interest out of it. In this way, banks multiply such amounts and earn profit out of that 1 lakh rupees. However, if all the amount deposited is used by banks in lending, it will lead to a situation where depositors will have to wait for their own money to be returned to them on time. Here, RBI comes into being by introducing the concept of CRR, by which Banks need to maintain a certain amount of deposits in the form of cash reserves.
● Statement 2 is correct: Money multiplier = 1/Cash reserve ratio. The higher the cash reserve, the lesser the money multiplier; hence, there is an inverse relation between both.

Answer. (B)
Explanation:
● Statement B is correct: High-powered money is the Currency issued by central banks and held by the public in the form of money in hands and money held by banks as deposits and reserves. It is also called reserve money or the monetary base of the economy. RBI regulated the money supply in the economy by controlling the supply of highly-powered money.

Answer. (A)
Explanation:
Demand liabilities include all the liabilities that need to be settled on demand.
It includes:
1. currency notes,
2. current deposits in the Bank, including savings and current account balance,
3. cheques drawn, etc.
Fixed deposits held in post office accounts are part of time liability. For example, Fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits.

Answer. (B)
Explanation:
● Statement 1 is incorrect but statement 2 is correct: Time liabilities are payable only after completion of a certain time, not on demand. It is the demand deposits in the form of savings deposits and current deposits with the banks which are highly liquid and are readily available on demand.
Time liabilities are the ones that need to be settled after completing a maturity period. They are otherwise the demand liabilities which need to be settled on demand.
● Statement 3 is correct: Examples of demand liabilities include– Cash certificates, cumulative and recurring deposits, fixed deposits, etc.

Answer. (A)
Explanation:
● Statement 1 is correct: Money supply is the total amount of currency used by the general public at a given moment. So, the money supply is money of the people either in cash form or in deposit form. The RBI releases data for four different money supply indicators. They are as follows:
o M1 = Currency with the public + Demand deposits of the public with banks
o M2 = M1 + Savings Deposits with Post Office Savings Bank
o M3 = M1 + Time deposits of the public with banks
o M4 = M3 + Total deposits with Post Office Savings Bank
● Statement 2 is Incorrect: Only deposits of public (including businesses) held by the banks are part of the money supply, and inter-bank deposits are excluded. Cash reserves of the commercial banks are not treated as a component of money supply because cash held by the creators/suppliers of money (RBI, Government and Banks) is never treated as a component of money supply.

Answer. (B)
Explanation:
Statement 1 is correct: Currency notes are guaranteed by the Central Government, subject to provisions of sub-section (2) Section 26 of RBI Act, 1934. A sovereign guarantee (legal guarantee by the government) is a promise made by a government to ensure that a particular obligation is fulfilled. In the context of currency, a sovereign guarantee can be used to assure investors that the government will back the value of its currency. This can be done by guaranteeing that the government will maintain a certain exchange rate or by promising to buy back its own currency at a certain price.
Statement 2 is incorrect: While currency notes and coins issued by the Government of India are considered as legal tender, cheques are not a legal tender. The post orders, bills of exchange, and bank drafts are also considered as non-legal tenders.
A legal Tender is a coin or a banknote legally tenderable for the discharge of Debt or obligation. The coins issued by the Government of India under Section 6 of The Coinage Act, 2011, shall be legal tender in payment or on account provided that a coin has not been defaced and has not lost weight to be less than such weight as may be prescribed in its case.
Every banknote issued by the Reserve Bank of India, unless withdrawn from circulation, shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the Central Government, subject to provisions of sub-section (2) Section 26 of RBI Act, 1934.
Statement 3 is correct: Coins and Currency notes are Known as fiat money. Coins and currency notes do not have intrinsic value like diamonds, gold, or silver coins.

Answer. (B)
Explanation:
● Statement B is correct: Repo Rate is the interest rate at which the RBI provides overnight liquidity up to a certain limit (0.25% of their NDTL) to banks against the collateral of Government and other approved securities under the Liquidity Adjustment Facility (LAF).
● Repo is a short form of “Repurchase Agreement”. When banks borrow from RBI at the repo rate, banks keep Government securities with RBI and get cash in return, with a promise that they will return (after overnight) this cash to RBI, and RBI will return the government securities to banks. The Repo Rate is also called the “Policy Rate”.
Additional information:
Statement 4 corresponds to the definition of Bank Rate- The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.

Answer. (C)
Explanation:
statement 1 is correct- The statutory liquidity ratio (SLR) is the amount of reserves that the scheduled commercial banks are required to maintain daily in safe and liquid assets such as government securities, gold, and cash with respect to their NDTL.
Statement 2 is correct- Excess CRR balances are also treated as liquid assets for the purpose of SLR, i.e., SLR can be maintained as cash balance with RBI.
Statement C is Incorrect: Scheduled Commercial Banks are required to maintain SLR as per the Banking Regulation Act 1949. The ceiling on SLR is 40%. Deposits of the Public are the liability of banks. The public’s demand deposits are the demand liability of the Bank, and time deposits are the time liability of the banks, and the total demand and time deposits of the public are called the ‘Net Demand and Time Liabilities (NDTL)’ of the banks.
Statement 4 is correct- Banks have less money available for commercial activities and lending when the SLR is high. Home loan interest rates frequently increase when this occurs. This is similar to how house loan interest rates are expected to decrease when the SLR is low.
● The CRR and SLR give the RBI the ability to limit the amount of money that banks can print while ensuring the safety and liquidity of public deposits. It guarantees banks have a secure reserve of assets to draw from when account holders request payment. Without the CRR and SLR rules, banks may lend the majority of deposits in an effort to increase profits, but if deposits are suddenly withdrawn in a rush, banks may find it difficult to make repayments.

Answer. (C)
Explanation:
In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
Statement 1 is correct: Banks can deposit any amount overnight (in future, it can be for longer tenure also) with RBI at a repo rate – 0.25% (it may change)
Statement 2 is correct: SDF is an additional tool for absorbing liquidity without any collateral. As there is no binding collateral constraint on RBI under SDF, it will strengthen the operating framework of monetary policy.
Statement 3 is correct: The SDF is also a financial stability tool in addition to its role in liquidity management.
● SDF will be at the discretion of banks and will be available on all days of the week throughout the year, unlike repo and reverse repo, which are available at the discretion of RBI.

Answer. (B)
Explanation:
It is a facility introduced in 2011.
● Statement 1 is incorrect, and Statement 2 is correct: Under MSF, scheduled commercial banks can borrow an additional amount of overnight money (over and above what is available to them through repo rate) from the Reserve Bank by dipping into their SLR portfolio up to a limit (2%) at a penal rate of interest. This provides a safety valve against unforeseen liquidity shocks to the banking system.
● When commercial banks take loans from the Reserve Bank of India at the Repo rate, banks need to keep Government Securities with RBI, but this security is in addition to the requirement under SLR. Commercial Banks cannot keep SLR securities to avail loans from RBI at the Repo Rate. However, under the Marginal Standing Facility, banks can borrow from RBI by dipping into the SLR reserve. This means that the banks can keep 2% of the SLR securities with RBI (i.e., the SLR can go down up to 2% below the average SLR requirement) and can borrow cash from RBI. This is called the Marginal Standing Facility (MSF).
● Statement 3 is correct: MSF rate is, however, higher than that of the repo rate.
MSF Rate = Repo Rate + 0.25%

Answer. (A)
Explanation:
● Statement 1 is correct: The LAF refers to the RBI’s operations through which it injects/absorbs liquidity into/from the banking system.
● Statement 2 is incorrect: LAF consists of overnight as well as term repo/reverse repos (fixed as well as variable rates).
Apart from LAF, instruments of liquidity management include MSF, SDF, outright open market operations (OMOs), forex swaps and market stabilization schemes (MSS).
● Open market operations are used by the Central bank to move the federal funds rate and influence other interest rates. It does this to stimulate or slow down the economy. The Central bank can increase the money supply and lower the federal funds rate by purchasing, usually, Treasury securities.

Answer. (D)
Explanation:
● Statement 1 is incorrect: The amount of cash that the scheduled commercial banks are required to maintain with RBI concerning their NDTL (on a fortnightly basis) is called CRR.
● Statement 2 is incorrect: “In terms of Section 42(1) of the RBI Act, 1934, the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate”.