RBI Based Questions asked In UPSC

 With reference to the Indian economy, consider the following statements :[2022]

1. If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities.

2.  If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct?

(a)        1 and 2 only

(b)        2 and 3 only

(c)        1 and 3 only

(d)        1, 2 and 3

 

Solution

 

Tip

If RBI buys G-sec then the money supply will increase → inflation will increase

 

Statement 1-If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities.

 

Security means a certificate or document indicating that its holder is eligible to receive a certain amount of money at a particular amount of time this could be of two types

 

1. Equity- share certificate

2. Debt-  Bond [UK] or Debenture [US]

 

Bonds	Debenture
are debt financial instruments issued by large corporations, financial institutions and government agencies that are backed up by collaterals or physical assets.	Not Backed by any collateral or Physical asset

 

According to IMF,

Inflation is the rate of increase in prices over a given period of time.

 

It is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

 

Or In Simple Word

 

It measures how much more expensive a set of goods and services has become over a certain period, usually a year.

 

To Combat Inflation RBI tries to decrease Money Supply and to do it will sell Government Securities.

 

Statement 2-  If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

 

In India we have a Free-Floating Exchange rate regime, Depreciation takes place when the Demand for the dollar is more than the supply.

 

RBI is Likely to Sell dollars to increase the supply of dollars.

 

 

Statement 3- If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

 

If the Interest rate In US and EU falls, there will be an Inflow of Dollars into the Indian  Market because investors to earn Higher return Invest Money In the Indian Market Which Will Lead to an increase in demand for rupees which ultimately leads to the appreciation of the Rupee.

 

So, To Reduce the Supply of Dollars in the Economy, RBI will Like to Buy dollars from the Market.

 

Recently When Dollar's prices were going up then RBI tried to sell Dollars to Control the prices but that measure failed because as the Interest rate In the US increased Investors pulled out a huge amount of Money from the Indian Market.

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In India, which one of the following is responsible for maintaining price stability by controlling inflation? 

[2022]

(a)        Department of Consumer Affairs

(b)        Expenditure Management Commission

(c)        Financial Stability and Development Council

(d)        Reserve Bank of India

 

Solution- D

 

As per the RBI act amendment of 2016, inflation control is the responsibility of RBI. 

Presently they are trying to control inflation between 2 to 6% CPI (All India).

 

 

The RBI was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, of 1934.

 

Though originally privately owned, since nationalisation in 1949, it is fully owned by the GoI.

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In India, the central bank's function as the 'lender of last resort' usually refers to which of the following? [2021]

 

1. Lending to trade and industry bodies when they fail to borrow from other sources.

 

2. Providing liquidity to the banks having a temporary crisis.

 

3. Lending to governments to finance budgetary deficits.

 

Select the correct answer using the code given below.

(a) 1 and 2

(b) 2only

(c) 2 and 3

(d) 3 only

 

 

Solution-B

 

Statement 1 - Lending to trade and industry bodies when they fail to borrow from other sources.

 

Loans to industries are not directly given by RBI.

 

Usually, RBI will open some special Windows to give loans to banks and NBFCs who will then indirectly give loans to industries

 

e.g. LTRO, SLTRO

 

Long-term Repo operation [LTRO] in 2020 - When RBI gave loans of more than 1 lakh crore to banks for a period of 1 to 3 years to increase the loanable funds with banks.

 

So, that they can loans to Industries.

 

Special LTRO - RBI gave loans for 3 years to only small finance banks so that they can give loans to

1. Micro and small industries

2. Unorganized sector entities

 

2. Providing liquidity to the banks having a temporary crisis.

 

In Simple words giving loans to the banks.

 

 

3. Lending to governments to finance budgetary deficits.

 

Most controversial Option but based standard on Books

 

RBI act as a banker to the Government.

 

 

A similar question asked in 2012 UPSC pre

 

The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following? [2012]

 

1. Other banks retain their deposits with the RBI.

 

2. The RBI lends funds to commercial banks in times of need.

 

3. The RBI advises commercial banks on monetary matters.

 

Select the correct answer using the codes given below:

(a) 2 and 3 only

(b) 1 and 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

 

Solution - D

 

RBI regulates commercial banks in matters of(2013)

 

1) Liquidity of assets

2) Branch expansion

3) Merger of banks

4) Winding-up of banks

Answer Codes:

(a) 1 & 4 only

(b) 2, 3 & 4 only

(c) 1, 2 & 3 only

(d) 1, 2, 3 & 4

 

Solution - D