Question 1

Which of the following is the PRIMARY function of the Reserve Bank of India as the banker to the government?

Accepted Answer

The Reserve Bank of India, established in 1935 and nationalised in 1949, performs multiple functions. As the banker to the government, the RBI manages the government's bank accounts, handles government borrowings, manages public debt, and facilitates government payments and receipts. This is a core constitutional and statutory function under the RBI Act 1934. Therefore, answer is B.

Question 2

The Monetary Policy Committee (MPC) of the RBI comprises how many members, and how frequently does it meet?

Accepted Answer

The Monetary Policy Committee was constituted under the RBI Act 1934 (amended in 2015) to determine the policy interest rate and the stance of monetary policy. The MPC consists of 6 members: 3 from the RBI (including the Governor as chairperson) and 3 external members appointed by the Government of India. The MPC meets at least 6 times a year, typically once every two months (bimonthly). Therefore, answer is C.

Question 3

Under which Act is the Cash Reserve Ratio (CRR) prescribed by the RBI?

Accepted Answer

The Cash Reserve Ratio (CRR) is prescribed by the RBI under Section 42 of the Banking Regulation Act 1949. The CRR is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as cash deposits with the RBI. This is a statutory requirement that all scheduled commercial banks must comply with. Therefore, answer is D.

Question 4

Which of the following is the correct definition of the Statutory Liquidity Ratio (SLR)?

Accepted Answer

The Statutory Liquidity Ratio (SLR) is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained in the form of liquid assets, primarily government securities (G-secs), gold, and cash. This requirement is prescribed by the RBI under Section 24 of the Banking Regulation Act 1949. Banks maintain SLR assets on their own balance sheets, unlike CRR which is deposited with the RBI. Therefore, answer is B.

Question 5

The Repo Rate is best defined as:

Accepted Answer

The Repo Rate is the interest rate at which the RBI lends money to commercial banks against the pledge of government securities and other approved securities. It is a key monetary policy tool used by the RBI to inject or absorb liquidity from the banking system. When the RBI wants to increase liquidity, it reduces the repo rate; when it wants to tighten liquidity, it increases the repo rate. Therefore, answer is A.

Question 6

The Reserve Bank of India was established in 1935 as a private institution and was nationalized in which year?

Accepted Answer

The Reserve Bank of India was established on 1 April 1935 under the Reserve Bank of India Act 1934 as a private shareholders' bank. It was nationalized on 1 January 1949 through the RBI (Transfer of Public Ownership) Act 1948, making it a fully government-owned institution. The RBI has been headquartered in Mumbai since its establishment. Therefore, answer is C.

Question 7

Under the Banking Regulation Act 1949, which section mandates that banks maintain a minimum Statutory Liquidity Ratio (SLR)?

Accepted Answer

Section 24 of the Banking Regulation Act 1949 empowers the RBI to prescribe the Statutory Liquidity Ratio (SLR) that scheduled commercial banks must maintain. SLR is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be held in the form of liquid assets — primarily government securities, gold, or cash. The current SLR is set by RBI through monetary policy decisions. Therefore, answer is A.

Question 8

Which of the following best describes the primary function of the Monetary Policy Committee (MPC) established under the RBI Act?

Accepted Answer

The Monetary Policy Committee (MPC) is a statutory body constituted under Section 45ZB of the RBI Act 1934 (inserted via the RBI (Amendment) Act 2015). The MPC comprises 6 members: 3 from RBI (including the Governor as Chair) and 3 external members appointed by the Government of India. The committee meets at least bimonthly to decide on the policy repo rate and other monetary policy measures. The primary function is to determine the benchmark policy rate (repo rate) to achieve the inflation target of 4% (with a band of ±2%) as mandated by the Government-RBI agreement. Therefore, answer is B.

Question 9

The Statutory Liquidity Ratio (SLR) requires banks to maintain a minimum percentage of their Net Demand and Time Liabilities (NDTL) in which form of assets?

Accepted Answer

The Statutory Liquidity Ratio (SLR) requires scheduled commercial banks to maintain a minimum percentage of their NDTL in the form of liquid assets. These approved liquid assets include: (1) Government securities (G-secs), (2) Gold, and (3) Cash. The RBI prescribes the SLR percentage under Section 24 of the Banking Regulation Act 1949. Banks must hold these assets themselves (not deposit with RBI, unlike CRR). Therefore, answer is D.

Question 10

The Monetary Policy Committee (MPC) of the RBI is constituted with how many members, and how frequently does it meet to decide on the policy repo rate?

Accepted Answer

The Monetary Policy Committee comprises 6 members: 3 from the RBI (including the Governor as Chair) and 3 external members appointed by the Government of India. The MPC meets at least 6 times per year (bimonthly) to review monetary policy and decide on the policy repo rate. This structure was established following the RBI Act Amendment 2016 to enhance transparency and institutional credibility in monetary policy formulation. Therefore, the answer is C.

Question 11

Which of the following best describes the transmission mechanism of monetary policy, specifically how a reduction in the RBI's repo rate affects the broader economy?

Accepted Answer

The transmission mechanism of monetary policy describes the process by which changes in the RBI's policy repo rate flow through the financial system to influence lending rates, credit growth, investment, and ultimately inflation and economic growth. When the RBI reduces the repo rate, banks' cost of borrowing from RBI decreases, which incentivizes them to lower their lending rates (MCLR, base rate). This increases credit availability and reduces borrowing costs for businesses and consumers, stimulating investment and consumption, which can boost economic activity but may also increase inflation if demand exceeds supply. The complete chain is: Repo Rate ↓ → Bank Lending Rates ↓ → Credit Growth ↑ → Investment & Consumption ↑ → Output & Inflation ↑. Therefore, the answer is B.

Question 12

The Marginal Standing Facility (MSF) rate is set at a spread above the repo rate. Which of the following correctly describes the purpose and operational mechanics of MSF in RBI's monetary policy framework?

Accepted Answer

The Marginal Standing Facility (MSF) is a standing facility provided by the RBI to scheduled commercial banks to borrow funds overnight against the pledge of eligible securities when all other sources of liquidity are exhausted. The MSF rate is set at a fixed spread (typically 100 basis points or 1%) above the repo rate, making it a more expensive source of liquidity than repo. The purpose of MSF is to: (1) provide a safety valve for banks facing unexpected liquidity shortfalls, (2) set a ceiling on overnight lending rates in the interbank market (because banks will not lend to each other at rates higher than MSF), and (3) discourage banks from over-relying on RBI borrowing by making it costly. MSF is thus a key instrument in RBI's liquidity management and transmission mechanism. Therefore, the answer is A.

Question 13

Open Market Operations (OMO) conducted by the RBI involve the purchase and sale of government securities. Which statement most accurately describes the monetary policy objective and mechanism of OMO?

Accepted Answer

Open Market Operations (OMO) are transactions in which the RBI buys and sells government securities (primarily central government securities and state development loans) in the secondary market to manage liquidity in the banking system and influence money supply and interest rates. When the RBI purchases government securities (OMO purchase), it injects liquidity into the banking system—banks receive cash in exchange for securities, increasing their loanable funds and reducing lending rates. Conversely, when the RBI sells government securities (OMO sale), it absorbs liquidity from the banking system, reducing banks' loanable funds and increasing lending rates. OMO is thus a key instrument for fine-tuning liquidity without changing the policy repo rate, and it is particularly useful for managing seasonal liquidity fluctuations. Unlike repo operations (which are collateralized and short-term), OMO transactions are outright purchases and sales of securities, making them a more permanent adjustment to liquidity. Therefore, the answer is B.

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