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RBI's Functions in Monetary Policy

Description: This quiz is designed to assess your understanding of the Reserve Bank of India's (RBI) functions in monetary policy.
Number of Questions: 15
Created by:
Tags: rbi monetary policy functions
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Which of the following is NOT a primary objective of RBI's monetary policy?

  1. Price stability

  2. Economic growth

  3. Financial stability

  4. Employment generation

Show answer
Correct Option: D
Explanation:

While RBI considers employment generation as an important goal, it is not a primary objective of its monetary policy.

What is the primary tool used by RBI to control the money supply?

  1. Open market operations

  2. Bank rate

  3. Cash reserve ratio

  4. Statutory liquidity ratio

Show answer
Correct Option: A
Explanation:

Open market operations involve buying and selling of government securities to influence the money supply.

What is the purpose of setting a bank rate by RBI?

  1. To control inflation

  2. To control deflation

  3. To signal the RBI's stance on monetary policy

  4. To regulate the activities of commercial banks

Show answer
Correct Option: C
Explanation:

The bank rate is used by RBI to communicate its monetary policy stance to the market.

What is the impact of an increase in the cash reserve ratio (CRR) on the money supply?

  1. It increases the money supply

  2. It decreases the money supply

  3. It has no impact on the money supply

  4. It depends on the level of economic activity

Show answer
Correct Option: B
Explanation:

An increase in CRR reduces the amount of money banks can lend, thereby decreasing the money supply.

What is the purpose of setting a statutory liquidity ratio (SLR) by RBI?

  1. To control inflation

  2. To control deflation

  3. To ensure that banks maintain a certain level of liquidity

  4. To regulate the activities of commercial banks

Show answer
Correct Option: C
Explanation:

SLR is a minimum percentage of deposits that banks are required to hold in liquid assets, such as cash and government securities.

Which of the following is NOT a quantitative tool of monetary policy?

  1. Open market operations

  2. Bank rate

  3. Moral suasion

  4. Cash reserve ratio

Show answer
Correct Option: C
Explanation:

Moral suasion is a qualitative tool of monetary policy, where RBI uses persuasion to influence the behavior of banks and other financial institutions.

What is the purpose of conducting repo operations by RBI?

  1. To inject liquidity into the banking system

  2. To absorb liquidity from the banking system

  3. To signal the RBI's stance on monetary policy

  4. To regulate the activities of commercial banks

Show answer
Correct Option: A
Explanation:

Repo operations involve RBI buying government securities from banks, thereby injecting liquidity into the banking system.

What is the impact of an increase in the repo rate on the cost of borrowing for banks?

  1. It increases the cost of borrowing

  2. It decreases the cost of borrowing

  3. It has no impact on the cost of borrowing

  4. It depends on the level of economic activity

Show answer
Correct Option: A
Explanation:

An increase in the repo rate makes it more expensive for banks to borrow from RBI, which in turn increases the cost of borrowing for their customers.

What is the purpose of conducting reverse repo operations by RBI?

  1. To inject liquidity into the banking system

  2. To absorb liquidity from the banking system

  3. To signal the RBI's stance on monetary policy

  4. To regulate the activities of commercial banks

Show answer
Correct Option: B
Explanation:

Reverse repo operations involve RBI selling government securities to banks, thereby absorbing liquidity from the banking system.

Which of the following is NOT a qualitative tool of monetary policy?

  1. Open market operations

  2. Bank rate

  3. Moral suasion

  4. Cash reserve ratio

Show answer
Correct Option: D
Explanation:

Cash reserve ratio is a quantitative tool of monetary policy, while moral suasion is a qualitative tool.

What is the impact of an increase in the reverse repo rate on the cost of borrowing for banks?

  1. It increases the cost of borrowing

  2. It decreases the cost of borrowing

  3. It has no impact on the cost of borrowing

  4. It depends on the level of economic activity

Show answer
Correct Option: B
Explanation:

An increase in the reverse repo rate makes it more attractive for banks to park their excess funds with RBI, which in turn reduces the cost of borrowing for banks.

Which of the following is NOT a function of RBI in monetary policy?

  1. To regulate the money supply

  2. To control inflation

  3. To promote economic growth

  4. To manage the foreign exchange reserves

Show answer
Correct Option: D
Explanation:

While RBI does have a role in managing the foreign exchange reserves, it is not a primary function of its monetary policy.

What is the purpose of setting a marginal standing facility (MSF) rate by RBI?

  1. To provide a window for banks to borrow funds from RBI at a higher rate

  2. To provide a window for banks to park their excess funds with RBI at a lower rate

  3. To signal the RBI's stance on monetary policy

  4. To regulate the activities of commercial banks

Show answer
Correct Option: A
Explanation:

MSF rate is the rate at which banks can borrow funds from RBI when they have exhausted all other borrowing options.

What is the impact of an increase in the MSF rate on the cost of borrowing for banks?

  1. It increases the cost of borrowing

  2. It decreases the cost of borrowing

  3. It has no impact on the cost of borrowing

  4. It depends on the level of economic activity

Show answer
Correct Option: A
Explanation:

An increase in the MSF rate makes it more expensive for banks to borrow from RBI, which in turn increases the cost of borrowing for their customers.

Which of the following is NOT a tool used by RBI to conduct monetary policy?

  1. Open market operations

  2. Bank rate

  3. Cash reserve ratio

  4. Fiscal policy

Show answer
Correct Option: D
Explanation:

Fiscal policy is a tool used by the government to influence the economy, while monetary policy is a tool used by RBI.

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