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ABHYAS PREP: INDIAN ECONOMY (UPSC AND MPSC) · MONEY AND BANKING

Monetary policy terms

Repo, reverse repo, SDF, MSF, CRR, SLR, OMO and the other RBI tools.

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Worked examples

Example 1 · level 1

In the RBI’s monetary policy, what does "Moral suasion" mean?

  1. an emergency overnight window where banks borrow from the RBI at a rate above the repo rate, even using their SLR securities
  2. the rate at which the RBI takes surplus money from banks without giving any securities in return
  3. the RBI persuading banks through talks, letters and advice, without a formal order
  4. the share of a bank’s deposits that it must keep as cash with the RBI, earning no interest
Show solution
  1. Moral suasion: the RBI persuading banks through talks, letters and advice, without a formal order.
  2. Marginal Standing Facility (MSF): an emergency overnight window where banks borrow from the RBI at a rate above the repo rate, even using their SLR securities.
  3. Standing Deposit Facility (SDF): the rate at which the RBI takes surplus money from banks without giving any securities in return (introduced in April 2022).
  4. Cash Reserve Ratio (CRR): the share of a bank’s deposits that it must keep as cash with the RBI, earning no interest.
  5. Source: https://rbi.org.in/

Answer: the RBI persuading banks through talks, letters and advice, without a formal order

Example 2 · level 2

In the RBI’s monetary policy, what does "Monetary Policy Committee (MPC)" mean?

  1. the share of a bank’s deposits that it must keep with itself in safe assets such as cash, gold and government securities
  2. the six-member committee that decides the policy repo rate
  3. a bank’s internal minimum lending rate, worked out from its own cost of funds, introduced in 2016
  4. the RBI buying or selling government securities in the open market to add or remove money
Show solution
  1. Monetary Policy Committee (MPC): the six-member committee that decides the policy repo rate.
  2. Open market operations (OMO): the RBI buying or selling government securities in the open market to add or remove money.
  3. Marginal cost of funds based lending rate (MCLR): a bank’s internal minimum lending rate, worked out from its own cost of funds, introduced in 2016.
  4. Statutory Liquidity Ratio (SLR): the share of a bank’s deposits that it must keep with itself in safe assets such as cash, gold and government securities.
  5. Source: https://rbi.org.in/

Answer: the six-member committee that decides the policy repo rate

Example 3 · level 3

Consider the following statements: 1. "Liquidity Adjustment Facility (LAF)" means the RBI’s daily window for lending money to banks and absorbing their extra money, through repo and reverse repo. 2. "Bank rate" means the RBI’s daily window for lending money to banks and absorbing their extra money, through repo and reverse repo. Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show solution
  1. Statement 1 is correct: Liquidity Adjustment Facility (LAF): the RBI’s daily window for lending money to banks and absorbing their extra money, through repo and reverse repo.
  2. Statement 2 is wrong: it pairs Bank rate with "the RBI’s daily window for lending money to banks and absorbing their extra money, through repo and reverse repo". In fact, Bank rate: the rate at which the RBI buys or rediscounts bills of exchange, also used to set penalties on banks (charged when a bank falls short of CRR or SLR).
  3. Source: https://rbi.org.in/

Answer: 1 only

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