Reserve Bank of India & Monetary Policy

Statement 1 is correct: Retail investors through demat accounts can invest in Treasury Bills and Government of India Debt Bonds in the primary market. Statement 2 is correct: The Negotiated Dealing System-Order Matching is a government securities trading platform of the Reserve Bank of India. Statement 3 is incorrect: Central Depository Services Ltd (CDSL), is the first listed Indian central securities depository based in Mumbai. CDSL is promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, and Standard Chartered Bank.

Statement 1 is incorrect. The ‘lender of last resort’ (LoLR) function of the central bank primarily applies to commercial banks and financial institutions, not trade and industry bodies. Businesses and industries generally rely on commercial banks, financial institutions, and capital markets for funds. The Reserve Bank of India (RBI) does not directly lend to trade and industry bodies under its LoLR function. Statement 2 is correct. The central bank (RBI) acts as the ‘lender of last resort’ for commercial banks facing liquidity shortages. This helps prevent bank failures and maintains financial stability. RBI provides liquidity through mechanisms like repo operations, open market operations (OMO), and special liquidity facilities. Statement 3 is incorrect. The RBI does not directly lend to the government to cover budgetary deficits under the 'lender of last resort' function. The government primarily finances deficits through market borrowings, treasury bills, and bonds. However, RBI can indirectly support the government by purchasing government securities in the open market (OMO) or monetizing debt in special situations (historically, through ways and means advances - WMA).

Statement A is incorrect: Increase in the Cash Reserve Ratio (CRR) in banks.
CRR is the percentage of deposits banks must keep with the RBI.
If CRR increases, banks have less money to lend, reducing the money multiplier. Statement B is incorrect: Increase in the Statutory Liquidity Ratio (SLR) in banks.
SLR is the percentage of deposits banks must keep in liquid assets like gold or government securities.
A higher SLR means less lending capacity, reducing the money multiplier. Statement C is correct: Increase in the banking habits of the people. If more people deposit money in banks instead of holding cash, banks get more reserves to lend, increasing the money multiplier.
This expands the credit creation process, leading to a higher money supply. Statement D is incorrect: Increase in the population of the country.
A higher population does not directly impact the money multiplier unless it leads to a rise in banking habits or economic activity.

Statement 1 is incorrect. Urban Cooperative Banks (UCBs) are not solely regulated by State Governments. They are jointly regulated by the Reserve Bank of India (RBI) and the respective State Governments. In 2020, the Banking Regulation (Amendment) Act, 2020 gave RBI more control over UCBs, bringing them largely under its regulatory framework for financial stability. Statement 2 is correct. As per the Banking Regulation (Amendment) Act, 2020, Urban Cooperative Banks can raise funds by issuing equity shares, preference shares, and unsecured debentures with RBI approval. This allows UCBs to strengthen their capital base and improve financial health. Statement 3 is correct. Initially, cooperative banks were regulated under state laws. In 1966, an amendment to the Banking Regulation Act, 1949, brought Urban Cooperative Banks (UCBs) under RBI's purview for banking-related functions. However, their management and administrative aspects remained under state cooperative laws.

Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates. Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more. Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity. Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity. Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

The immediate effect on aggregate money supply in the economy, if you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, will be “No change”. Reason: Aggregate money supply refers to the total amount of money circulating in the economy, including both cash and deposits in commercial banks. - M3 = M1 + Time Deposits with Banks Where: - M1 = Currency in circulation + Demand deposits with banks + Other deposits with the central bank When you withdraw cash from your demand deposit account, you are simply converting your deposit (which is part of the money supply) into currency (also part of the money supply). The total amount of money in the system remains the same, just the composition (ratio of cash to deposits) changes.

Statement 1 is incorrect. In terms of short-term credit delivery to the agriculture sector, Scheduled Commercial Banks (SCBs) and Regional Rural Banks (RRBs) generally deliver more credit compared to District Central Cooperative Banks (DCCBs). SCBs and RRBs have a larger network and resources to provide credit to the agriculture sector. Statement 2 is correct. One of the primary functions of DCCBs is indeed to provide funds to the Primary Agricultural Credit Societies (PACS). DCCBs act as the intermediary between the Reserve Bank of India (RBI) and PACS, facilitating the flow of credit from the central bank to the grassroots level through cooperative credit institutions. Hence, option B is the correct answer.

* Service area approach (SAA) is an improved version of area approach of Lead Bank Scheme. * Under SAA plan, each commercial bank / RRB branch in the rural and semi-urban area is designated to serve 15 to 25 villages for the planned and orderly development of rural and semi-urban areas. * The designated branch of a bank has to meet the banking needs of its service area vis--vis forge effective linkages between bank credit, production, productivity, and increase in income levels of the villages.

Money multiplier: It refers to the extent to which commercial banks can create new money based on deposits. It's calculated as the reciprocal of the reserve ratio (required reserves divided by total deposits). Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): These are regulatory tools used by the central bank to control the money supply. Higher CRR and SLR: Banks are required to hold a larger portion of deposits as reserves with the central bank. This reduces the amount of money available for lending, thus decreasing the money multiplier. Lower CRR and SLR: Banks can lend out a larger portion of deposits, increasing the money multiplier. Banking habit: When people deposit more money in banks, it increases the pool of funds available for lending. This allows banks to create more new money through the lending process, leading to a higher money multiplier. Population growth: While population growth can lead to higher demand for money, it doesn't directly affect the money multiplier mechanism itself.