1. Assertion (A): The Monetary Policy Committee may choose not to raise the policy rate in response to a temporary spike in vegetable prices.
Reason (R): A policy rate increase cannot increase the supply of perishable food items, and the MPC generally looks through supply shocks unless they spill over into core inflation and inflation expectations.
Which one of the following is correct?
✅ Correct answer: (A) LOOKING THROUGH SUPPLY SHOCKS. Monetary policy works on aggregate demand; a vegetable spike (onion, tomato) due to weather or logistics is a relative price change that reverses once supply recovers, so a rate hike would hurt growth without lowering prices. The Economic Survey and RBI therefore distinguish headline from core inflation. But if food shocks recur frequently, expectations become de-anchored, wages and prices of other goods follow ('second-round effects'), and the MPC must act; in September 2026 food inflation was around 7.7%, and the MPC cited second-round-effect and monsoon/oil risks in raising the repo in October. Supply-side responses: buffer stock releases, import duty cuts, stock limits, export curbs (which have their own trade costs). Hence A and R are both true and R explains A.
2. Consider the following statements about the RBI Monetary Policy announced in October 2026:
1. The policy repo rate was raised by 25 basis points to 5.50 per cent.
2. The stance was changed from neutral to calibrated tightening.
3. The SDF rate was set at 5.25 per cent and the MSF rate and Bank Rate at 5.75 per cent.
4. The Bank Rate was kept equal to the repo rate at 5.50 per cent.
Which of the statements given above are correct?
✅ Correct answer: (D) OCTOBER 2026 POLICY (5-7 October, 63rd MPC meeting, Governor Sanjay Malhotra). The repo was raised 25 bps from 5.25% to 5.50% (the earlier cuts of 2025 had taken it down to 5.25%; the August 2026 policy held it at 5.25% with a neutral stance). The stance moved from 'neutral' to 'calibrated tightening', which signals that further hikes depend on data, primarily inflation. The corridor adjusted automatically: SDF 5.25%, MSF 5.75%, Bank Rate 5.75% - Bank Rate always equals MSF, not repo, so statement 4 is wrong. The RBI's projections cited CPI inflation of about 5.2% and real GDP growth of about 7.1% for 2026-27, with risks from crude oil, deficient monsoon/El Nino, geopolitics and global financial conditions. 'Stance' tells you the direction of liquidity and rates: accommodative (cut/ample liquidity), neutral (either way), withdrawal of accommodation (tightening), calibrated tightening (gradual). [Recheck on rbi.org.in; this item is based on press reports of the 7 Oct 2026 statement.]
3. Assertion (A): An increase in the policy repo rate is a contractionary monetary policy action that tends to reduce inflation.
Reason (R): A higher repo rate raises the cost at which banks borrow liquidity from the RBI, which pushes up lending rates and dampens credit-driven aggregate demand.
Which one of the following is correct?
✅ Correct answer: (A) REPO LOGIC. Repo (repurchase) rate is the rate at which the RBI lends short-term funds to banks against government securities, under a repurchase agreement. When the rate rises, banks' marginal cost of funds rises, and through the transmission channel lending rates go up and credit demand falls, which reduces aggregate demand and demand-pull inflation: a CONTRACTIONARY (dear money) stance. A cut does the opposite (cheap money, expansionary). Note the caveat: inflation caused by supply shocks (food, crude) responds weakly, and in an economy with large informal and cash-based segments the transmission is imperfect. Real policy rate = repo - expected/actual inflation: with repo 5.50% and September 2026 CPI of 5.54%, the real repo rate is approximately zero (about -0.04 percentage points), which is why the MPC moved to a tightening stance.
4. With reference to the Monetary Policy Committee (MPC) of India under the Reserve Bank of India Act, 1934, consider the following statements:
1. It has six members, three from the RBI and three external members appointed by the Central Government.
2. The Governor of the RBI is the ex-officio Chairperson of the MPC.
3. The external members hold office for four years and are not eligible for reappointment.
4. Decisions are taken by a majority of the members present and voting, and the Governor has a casting vote in case of a tie.
Which of the statements given above are correct?
✅ Correct answer: (D) MPC FRAMEWORK. Inserted by the Finance Act 2016 (RBI Act, Sec. 45ZB), the six-member MPC comprises the Governor (Chairperson, ex-officio), the Deputy Governor in charge of monetary policy, one officer of the RBI nominated by the Central Board, and three external members appointed by the Central Government on the recommendation of a search committee headed by the Cabinet Secretary. External members serve four years and cannot be reappointed. Quorum is four, at least four meetings a year are mandatory, each member has one vote, and the Governor has a second (casting) vote in a tie. The MPC sets the policy repo rate to achieve the inflation target; the RBI publishes the minutes after 14 days and a Monetary Policy Report twice a year. Before 2016 the Governor alone decided on the advice of a Technical Advisory Committee (Urjit Patel Committee, 2014, recommended the MPC). All four statements are correct.
5. Consider the following statements about money supply aggregates in India:
1. Reserve Money (M0) consists of currency in circulation, bankers' deposits with the RBI and other deposits with the RBI.
2. Reserve Money is also known as high-powered money.
3. The money multiplier is the ratio of broad money (M3) to Reserve Money.
4. Post Office savings bank deposits are included in broad money (NM3).
Which of the statements given above are correct?
✅ Correct answer: (B) MONEY AGGREGATES. Reserve Money (M0, high-powered money) = Currency in circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI; it represents the RBI's monetary liabilities and is the base on which banks create deposits. Money multiplier = M3 / M0 (or, in the textbook formula, (1 + c) / (c + r) where c is the currency-deposit ratio and r the reserve-deposit ratio). RBI's current money measures: NM1 = currency with the public + demand deposits + other deposits with RBI; NM2 = NM1 + short-term time deposits (up to one year); NM3 (broad money) = NM2 + long-term time deposits + certificates of deposit + call/term borrowing from financial institutions. Post Office savings deposits are NOT in NM3 - they are in the wider liquidity measures (L1, L2, L3). Statement 4 is wrong.
6. Consider the following statements regarding the RBI's liquidity management framework:
1. The Standing Deposit Facility allows banks to park surplus funds with the RBI without any collateral.
2. A repo operation injects liquidity into the banking system, whereas a reverse repo operation absorbs it.
3. Variable Rate Repo and Variable Rate Reverse Repo auctions are used for fine-tuning liquidity at various tenors.
4. The MSF rate is set below the repo rate to encourage banks to borrow from the RBI.
Which of the statements given above are correct?
✅ Correct answer: (C) LIQUIDITY TOOLS. Banks face daily liquidity surplus or deficit; the RBI keeps the weighted average call rate near the repo rate. Standing facilities: SDF (floor, no collateral, replaced the fixed-rate reverse repo as the floor in April 2022) and MSF (ceiling, penal-like at repo + 25 bps, secured against government securities including SLR holdings). Main operations: fixed-rate repo, variable rate repo (VRR) for injection at 7/14/28-day tenors, variable rate reverse repo (VRRR) for absorption, OMO purchases/sales for durable liquidity, buy-sell USD swaps, and CRR changes. When the system is in liquidity SURPLUS the SDF rate becomes the effective floor and the call rate drifts below the repo; in deficit the call rate moves toward the MSF. Statement 4 is wrong: the MSF is ABOVE the repo (repo + 25 bps) because it is a last-resort window meant to be costlier.
7. With reference to the foreign exchange regime in India, consider the following statements:
1. The Indian rupee is fully convertible on the current account since August 1994, when India accepted Article VIII of the IMF Articles of Agreement.
2. Capital account convertibility in India is partial.
3. The Foreign Exchange Management Act, 1999 replaced the Foreign Exchange Regulation Act, 1973.
4. The Tarapore Committee on Capital Account Convertibility was constituted in 1997.
Which of the statements given above are correct?
✅ Correct answer: (B) FOREX REGIME. After the 1991 balance of payments crisis, India introduced the Liberalised Exchange Rate Management System (LERMS, 1992, dual rate) and unified the rate in March 1993, adopting market-determined rates; in August 1994 it accepted IMF Article VIII obligations (current account convertibility). FERA 1973 (restrictive, criminal in nature) was replaced by FEMA 1999 (civil in nature, effective 1 June 2000), which 'manages' rather than 'regulates' foreign exchange. The Tarapore Committee (1997, under S.S. Tarapore) laid down preconditions (fiscal deficit of 3.5% of GDP, inflation of 3-5%, NPA reduction, a CRR cut) for full capital account convertibility; a second committee in 2006 repeated the roadmap. Capital account is partially open: FDI mostly automatic, FPI limits, ECB norms, ODI and LRS limits of USD 250,000 per resident individual per year. All four statements are correct.
8. With reference to Government securities (G-secs) and bond yields in India, consider the following statements:
1. The price of a bond and its yield move in opposite directions.
2. State Development Loans are dated securities issued by State Governments.
3. Treasury Bills are issued at a discount to face value and redeemed at par.
4. Government securities carry the same credit default risk as corporate bonds of similar tenor.
Which of the statements given above are correct?
✅ Correct answer: (B) G-SECS. Dated G-secs (maturity 5 to 40 years, fixed or floating coupon) and T-bills are issued by the RBI on behalf of the Central Government through auctions; State Development Loans (SDLs) by States. Bond price and yield have an inverse relationship: if yields rise (for example after a repo hike), the price of existing bonds with lower coupons falls. Sovereign securities in the domestic currency are regarded as free of default (credit) risk because the government can print the currency/levy taxes, though they carry interest-rate risk, so corporate bonds, which carry credit risk, offer a 'spread' over G-sec yields; statement 4 is wrong. The 10-year G-sec yield is the benchmark. Foreign Portfolio investors were given access to the Fully Accessible Route (FAR) bonds, which led to the inclusion of Indian G-secs in JP Morgan's GBI-EM Global index from June 2024. The 'yield curve' links yields to maturities; an inverted curve signals expectations of lower rates/recession.
9. In an economy, the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. If the central bank increases Reserve Money by Rs 100 crore, by how much will the money supply increase (using the simple money multiplier)?
✅ Correct answer: (A) MONEY MULTIPLIER. Money supply M = Currency + Deposits; Reserve Money H = Currency + Reserves. With c = currency/deposits = 0.2 and r = reserves/deposits = 0.1: M/H = (c + 1) / (c + r) = 1.2 / 0.3 = 4. So a Rs 100 crore rise in H raises M by 4 x 100 = Rs 400 crore. Options 'Rs 1,000 crore' uses 1/r (10) and ignores currency leakage, which is only valid when c = 0; the smaller multiplier arises because the public holds some money as cash, which does not get re-lent. Hence the RBI controls the multiplier indirectly through CRR (which raises r) and through public preference for cash (c). A higher CRR lowers the multiplier, i.e. contractionary.
10. Which of the following are qualitative (selective) instruments of monetary control used by the RBI?
1. Margin requirements on loans against securities
2. Moral suasion
3. Selective credit control
4. Cash Reserve Ratio
5. Open Market Operations
Select the correct answer using the code given below:
✅ Correct answer: (B) QUANTITATIVE vs QUALITATIVE. QUANTITATIVE (general) tools regulate the TOTAL volume of credit/money in the economy: CRR, SLR, repo/reverse repo and LAF/MSF/SDF, Bank Rate, OMOs, MSS. QUALITATIVE (selective) tools regulate the DIRECTION or USE of credit: margin requirements (the haircut on collateral, e.g. against shares or commodities), selective credit control (restrictions on credit for specific sectors, e.g. sensitive commodities), rationing of credit, moral suasion (persuasion through letters, meetings), direct action and publicity. So 1, 2 and 3 are qualitative; CRR and OMO are quantitative. Selective tools are used when general tools would hurt sectors that are not the source of the problem, for instance a speculative surge in a specific asset.
11. Consider the following statements about the Reserve Bank of India:
1. It was established on 1 April 1935 under the Reserve Bank of India Act, 1934.
2. The Hilton Young Commission (1926) recommended the establishment of a central bank for India.
3. It was nationalised on 1 January 1949.
4. C.D. Deshmukh was the first Governor of the RBI.
Which of the statements given above are correct?
✅ Correct answer: (C) RBI HISTORY. The Royal Commission on Indian Currency and Finance (Hilton Young Commission, 1926) recommended a central bank, which led to the RBI Act, 1934; the RBI began on 1 April 1935 (initially headquartered in Calcutta and shifted to Mumbai in 1937) as a shareholders' bank, and was nationalised on 1 January 1949. Its first Governor was Sir Osborne Smith (1935-37); C.D. Deshmukh (1943-49) was the first INDIAN Governor, so statement 4 is wrong. Its functions: issuer of currency notes (other than one-rupee notes and coins, which the Government issues), banker to the Government and banks, regulator of banks and payment systems, manager of foreign exchange (FEMA 1999) and monetary authority. The Governor is appointed by the Central Government; the Central Board has the Governor, up to four Deputy Governors and other directors.
12. With reference to the flexible inflation targeting framework in India, consider the following statements:
1. The inflation target is notified by the Central Government in consultation with the RBI once every five years.
2. The target is defined in terms of the Consumer Price Index (Combined).
3. The target is 4 per cent with a tolerance band of plus or minus 2 percentage points.
4. The RBI is deemed to have failed if inflation exceeds the upper band for even a single quarter.
Which of the statements given above are correct?
✅ Correct answer: (A) INFLATION TARGETING. The RBI Act (Sec. 45ZA) requires the Centre, in consultation with the RBI, to notify the inflation target every five years; the first notification (Aug 2016, for 2016-21) set 4% with a band of 2-6% on CPI-Combined, and it was retained for 2021-26. The failure condition (Sec. 45ZN) is NOT a single quarter: the RBI is deemed to have failed if average inflation is above the upper tolerance level (6%) OR below the lower level (2%) for THREE consecutive quarters, after which it must send the Government a report stating reasons for the failure, remedial actions and the time to return to target. Before 2016 the RBI followed a multiple-indicators approach (Urjit Patel Committee, 2014 -> glide path). In September 2026 CPI inflation was about 5.54%, which lies inside the 2-6% band but above the 4% mid-point. [Recheck the target notification for the period beginning April 2026 on rbi.org.in / Gazette.]
13. Match List-I (Committee) with List-II (Subject) and select the correct answer using the code given below:
List-I (Committee)
List-II (Subject)
(A)Chakravarty Committee (1985)
(1)Review of the monetary system, favouring monetary targeting with feedback
(B)Tarapore Committee (1997)
(2)Capital account convertibility
(C)Urjit Patel Committee (2014)
(3)Revised monetary policy framework, with CPI as the nominal anchor and an MPC
(D)Nachiket Mor Committee (2013)
(4)Comprehensive financial services for small businesses and low-income households
✅ Correct answer: (D) COMMITTEES. Chakravarty Committee (Committee to Review the Working of the Monetary System, 1985, Sukhamoy Chakravarty): recommended monetary targeting with feedback (money supply growth based on expected real growth and an acceptable inflation rate), and a market for Government securities with flexible rates. Tarapore Committee (1997, 2006): capital account convertibility roadmap. Urjit Patel Committee (Expert Committee to Revise and Strengthen the Monetary Policy Framework, 2014): shift to flexible inflation targeting with the new CPI as the nominal anchor, a glide path to 4% by 2018 (with a +/-2% band), and the creation of a six-member MPC - later enacted in 2016. Nachiket Mor Committee (2013): financial inclusion - payments banks, small finance banks, universal bank account, and the Aadhaar-linked inclusion. Others to recall: Narasimham I and II (banking), Raghuram Rajan Committee (financial sector reforms, 2008), and Y.H. Malegam Committee (microfinance, 2011). Correct code: A-1, B-2, C-3, D-4.
14. Consider the following statements about the transparency and accountability practices of the Monetary Policy Committee:
1. The minutes of the MPC meeting are published on the 14th day after the meeting.
2. The RBI publishes a Monetary Policy Report every six months explaining the sources of inflation and the forecast.
3. The MPC must hold at least four meetings in a year.
4. The decision of the MPC is binding on the Government of India and cannot be questioned by Parliament.
Which of the statements given above are correct?
✅ Correct answer: (D) MPC TRANSPARENCY. RBI Act, Sec. 45ZL: the MPC proceedings (minutes) are published on the fourteenth day after every meeting, showing the resolution, each member's vote and statement; Sec. 45ZM: the RBI publishes a Monetary Policy Report every six months with the sources of inflation and a forecast for 6-18 months ahead; the MPC must meet at least four times a year (in practice six times, with the schedule announced in advance). Accountability runs through the inflation-target failure clause (Sec. 45ZN) and the RBI's report to the Government, and the Government's power to notify the target - not through any binding of the Government by MPC decisions. The MPC's repo decisions are binding on the RBI's operations, not on the Government, and the RBI's governance remains accountable to Parliament through the Finance Ministry; the claim in statement 4 is not in the Act.
15. Consider the following statements about the RBI's foreign exchange market operations:
1. When the RBI purchases foreign currency from the market, rupee liquidity in the system increases.
2. Sterilisation involves offsetting the monetary effect of forex intervention through instruments such as OMO sales or the MSS.
3. Unsterilised purchases of foreign currency tend to increase the money supply and can add to inflationary pressure.
4. India follows a fixed exchange-rate regime with the rupee pegged to the US dollar.
Which of the statements given above are correct?
✅ Correct answer: (A) FOREX INTERVENTION. India follows a market-determined, managed-float exchange rate regime: the RBI does not target a level but intervenes (spot, forward and swaps) to curb excessive volatility, so statement 4 is wrong (the rupee was pegged to the pound/dollar in the Bretton Woods era until 1971-75, moved to a basket link and then a managed float, and became market-determined after the 1993 unification of rates and the 1994 current-account convertibility under IMF Article VIII). Buying dollars: RBI pays rupees, so rupee liquidity rises and the forex reserves rise; unsterilised, this expands reserve money and money supply. Sterilisation (to avoid inflation): sell government securities (OMO), issue MSS bills, use reverse repo/VRRR, or raise CRR. Selling dollars to defend the rupee does the reverse: it drains rupee liquidity. The 'impossible trinity' (Mundell-Fleming): a country cannot have a fixed exchange rate, free capital mobility and independent monetary policy together.
16. With reference to the Central Bank Digital Currency (CBDC) in India, consider the following statements:
1. The digital rupee is a legal tender issued by the Reserve Bank of India.
2. The pilot for the wholesale segment started in November 2022 and for the retail segment in December 2022.
3. CBDC is the digital form of the sovereign currency, unlike cryptocurrencies, which are privately issued.
4. The digital rupee pays interest to holders, like a bank deposit.
Which of the statements given above are correct?
✅ Correct answer: (A) e-RUPEE (e₹). Announced in Budget 2022-23 (digital rupee to be issued in 2022-23 using blockchain and other technologies) and enabled through the RBI Act amendment by the Finance Act 2022 ('bank note' now includes digital form). The e₹-W (wholesale) pilot began on 1 November 2022 for interbank settlement of government securities; the e₹-R (retail) pilot began on 1 December 2022 in select cities. Features: sovereign, central-bank liability, fungible with cash one-for-one, tokens/wallet-based, offline functionality piloted, and NOT interest-bearing as it is a substitute for physical cash - so statement 4 is wrong. Cryptocurrencies are private, volatile, not legal tender; the Government taxes crypto gains at 30% (Sec. 115BBH) with 1% TDS but has not regulated or banned them. The RBI's aims: lower currency-management cost, payments efficiency, cross-border settlements.
17. Consider the following statements about the Phillips curve and the sacrifice ratio:
1. The short-run Phillips curve shows an inverse relationship between inflation and unemployment.
2. Stagflation in the 1970s weakened the case for a stable long-run trade-off between inflation and unemployment.
3. Milton Friedman and Edmund Phelps argued that the long-run Phillips curve is vertical at the natural rate of unemployment.
4. The sacrifice ratio measures the percentage of output lost for each percentage point reduction in inflation.
Which of the statements given above are correct?
✅ Correct answer: (B) PHILLIPS CURVE. A.W. Phillips (1958) found an inverse relation between wage inflation and unemployment in the UK; Samuelson and Solow extended it to price inflation. Policymakers saw a 'menu' of inflation-unemployment combinations. The 1970s oil shocks produced high inflation and high unemployment together (stagflation), and Friedman (1968) and Phelps argued that with adaptive expectations the trade-off disappears in the long run: the long-run Phillips curve is vertical at the Natural Rate of Unemployment (NAIRU), so expansion only raises inflation. The sacrifice ratio = percentage points of annual output lost / percentage-point reduction in inflation; it is lower when the central bank is credible and expectations are anchored - the case for inflation targeting. Rational expectations (Lucas) say anticipated policy is ineffective even in the short run. In India, the trade-off is complicated by food-supply shocks, large informal employment (no clean unemployment measure), and the role of the output gap. All four statements are correct.
18. Match List-I (Monetary instrument) with List-II (Feature) and select the correct answer using the code given below:
List-I (Monetary instrument)
List-II (Feature)
(A)Cash Reserve Ratio
(1)Share of NDTL kept as cash with the RBI, without interest
(B)Statutory Liquidity Ratio
(2)Share of NDTL kept in gold, cash or approved securities by banks themselves
(C)Open Market Operations
(3)Outright purchase or sale of government securities by the RBI
(D)Market Stabilisation Scheme
(4)Issue of government securities/T-bills to absorb surplus liquidity, the proceeds being held in a separate account
✅ Correct answer: (C) QUANTITATIVE TOOLS. CRR (RBI Act, Sec. 42): banks keep a prescribed share of Net Demand and Time Liabilities (NDTL) as balances with the RBI; no interest is paid; the statutory floor of 3% was removed in 2006, so the RBI can set any rate. SLR (Banking Regulation Act, Sec. 24): banks hold a share of NDTL in cash, gold or unencumbered approved securities with themselves; the statutory ceiling is 40%. OMO: outright sale/purchase of G-secs by the RBI to drain/inject durable liquidity (sale = contractionary). MSS (2004): government issues T-bills and dated securities to sterilise capital inflows, with the proceeds kept in a separate non-spendable account (impounded) - an instrument of sterilisation operated jointly by the Government and the RBI. Compare qualitative tools: margin requirements, selective credit control, moral suasion. Correct code: A-1, B-2, C-3, D-4.
19. Arrange the following steps of the monetary policy transmission mechanism after a repo rate hike in the correct sequence:
A. The MPC raises the policy repo rate
B. Banks' repo-linked and MCLR-based lending rates increase
C. Borrowing for consumption and investment becomes costlier, and credit demand weakens
D. Aggregate demand slows and inflationary pressure eases
Select the correct answer using the code given below:
✅ Correct answer: (B) TRANSMISSION. (1) Policy signal: repo raised. (2) Money-market and bond yields and bank deposit/lending rates adjust. Since October 2019 all new floating-rate retail and MSME loans must be linked to an external benchmark (repo rate in most banks, EBLR), so repo changes pass through to borrowers much faster than under MCLR; for older loans the MCLR passes through slowly. (3) Higher cost of credit curbs consumption and investment demand. (4) Lower aggregate demand reduces demand-pull inflation; exchange-rate and asset-price channels (higher rates attract capital, strengthen the rupee, lower import prices) operate alongside. The lag is typically 2-4 quarters and food/fuel supply shocks, which monetary policy cannot fix, are why the MPC looks through them unless they spill over into core inflation and expectations.
20. In September 2026, India's CPI retail inflation was about 5.54 per cent, up from about 4.8 per cent in August 2026, with food inflation at about 7.7 per cent. Which one of the following is the most appropriate inference?
✅ Correct answer: (C) READING THE INFLATION PRINT. The tolerance band is 2-6%; 5.54% is within it (so no failure, and in any case failure needs THREE consecutive quarters outside the band) but well above the 4% target. With food inflation about 7.7% and food's weight in the CPI basket large (about 46% in the earlier 2012 series; the new series revises weights), the headline rise is food-led, and supply-driven food spikes (onion, vegetables) are partly transitory, which is why the MPC distinguishes headline from CORE inflation (excluding food and fuel). The October 2026 MPC nonetheless tightened, citing the risks of second-round effects, oil and a deficient monsoon. Remember that CPI uses a Laspeyres basket (fixed base-year weights), while WPI (Office of the Economic Adviser, DPIIT) tracks wholesale prices and the GDP deflator is broader. [Source: MoSPI CPI release of 12 Oct 2026 as reported; recheck mospi.gov.in.]
21. A simple quantity-theory economy has money supply M = 500, velocity of circulation V = 4 and real output Y = 1,000. Consider the following statements:
1. The price level P is 2.
2. If the money supply doubles to 1,000 with V and Y unchanged, the price level doubles to 4.
3. The equation of exchange is MV = PY.
4. According to the strict quantity theory, a rise in money supply raises real output and leaves the price level unchanged in the long run.
Which of the statements given above are correct?
✅ Correct answer: (D) QUANTITY THEORY. Irving Fisher's equation of exchange: MV = PT (or MV = PY with Y real output). P = MV / Y = (500 x 4) / 1,000 = 2. Doubling M with V and Y fixed gives P = (1,000 x 4) / 1,000 = 4. The classical/monetarist conclusion (Milton Friedman: 'inflation is always and everywhere a monetary phenomenon') is that in the long run money is neutral: changes in M change P proportionally and leave real output unchanged - so statement 4 reverses the theory. The Cambridge version (Marshall, Pigou): M = kPY where k = 1/V is the desired cash balance fraction. Keynesians contend that V is unstable and that in slack economies a rise in M can raise Y; in India, shifts in velocity from digital payments and the supply shocks in food prices mean the link between money growth and inflation is looser, which is why the RBI targets inflation directly.
22. Consider the following statements about money market instruments in India:
1. Treasury Bills are short-term government securities issued with maturities of 91 days, 182 days and 364 days.
2. Commercial Paper is an unsecured money market instrument issued by corporates with a maturity from 7 days up to one year.
3. Certificates of Deposit are issued by scheduled commercial banks and some financial institutions.
4. Call money is borrowing and lending for a period of 15 days to one year.
Which of the statements given above are correct?
✅ Correct answer: (C) MONEY MARKET. The money market deals in funds of up to one year. Call money: overnight; notice money: 2 to 14 days; term money: 15 days to one year - so the description in statement 4 is that of term money, not call money. T-Bills (zero-coupon, issued at a discount, redeemed at par; the Government's short-term borrowing; 91/182/364 days; Cash Management Bills for even shorter needs). Commercial Paper: unsecured promissory notes of highly rated corporates, primary dealers and financial institutions (7 days to 1 year). Certificates of Deposit: negotiable term deposit instruments issued by banks (7 days to 1 year) and by select all-India financial institutions (1 to 3 years). Also: repo/reverse repo, collateralised borrowing and lending obligation (CBLO/TREPS operated by CCIL). The capital market, by contrast, deals in long-term securities (equity, debentures, G-secs of more than one year).
23. With reference to the issue of currency in India, consider the following statements:
1. The Reserve Bank of India has the sole right to issue banknotes of denominations of Rs 2 and above.
2. One-rupee notes and all coins are issued by the Government of India.
3. The RBI follows the Minimum Reserve System, under which it must hold assets of Rs 200 crore, of which gold must be at least Rs 115 crore, as backing for note issue.
4. The signature on a one-rupee note is that of the Governor of the RBI.
Which of the statements given above are correct?
✅ Correct answer: (D) CURRENCY ISSUE. Under Sec. 22 of the RBI Act 1934, the RBI has the sole right to issue banknotes (Rs 2 and above). One-rupee notes and coins are issued by the Government (the Coinage Act 2011; the Finance Secretary signs the one-rupee note, while other notes bear the Governor's signature and the 'I promise to pay the bearer' clause, a liability of the RBI). The backing system: the Minimum Reserve System (since 1957) requires the RBI to hold Rs 200 crore of assets - not less than Rs 115 crore in gold coin/bullion and Rs 85 crore in foreign securities - against any amount of notes issued; before it, the Proportional Reserve System (1934-1956) applied. The notes are printed at Nashik and Dewas (Security Printing Corporation / Bank Note Press) and by the Bharatiya Reserve Bank Note Mudran at Mysuru and Salboni; coins are minted at Mumbai, Kolkata, Hyderabad and Noida. Currency chests hold the stock. Statement 4 is wrong (the Finance Secretary signs the one-rupee note).
24. Consider the following statements about the consequences of the RBI raising the repo rate by 25 basis points:
1. Government securities yields generally tend to rise, lowering bond prices.
2. EBLR-linked floating-rate home loans become costlier almost immediately.
3. Deposit rates of banks tend to rise with a lag.
4. The rupee tends to depreciate because higher rates reduce the attraction of Indian assets for foreign investors, other things being equal.
Which of the statements given above are correct?
✅ Correct answer: (D) RATE-HIKE EFFECTS. (1) Bond market: a repo hike raises the yield on new bonds and lowers the price of existing ones (inverse relationship); (2) Credit: EBLR-linked loans reprice at the next reset, almost immediately; MCLR-linked loans reprice with a lag; (3) Deposits: banks raise deposit rates with a lag, benefitting savers and senior citizens; (4) Exchange rate: other things equal, a higher domestic interest rate widens the interest-rate differential and attracts portfolio capital, causing the rupee to APPRECIATE, not depreciate (the uncovered interest parity logic), so statement 4 is wrong. Other effects: lower credit growth, weaker consumption/investment demand, lower inflation, higher cost for the Government's own borrowing (higher G-sec yields), pressure on the NBFC/housing sectors. In October 2026, repo rose 25 bps to 5.50% - hence the first three effects began from that date.
25. The RBI's Liquidity Adjustment Facility (LAF) corridor is symmetric around the policy repo rate. If the policy repo rate is 5.50 per cent, which one of the following sets is correct?
✅ Correct answer: (C) LAF CORRIDOR. Since April 2022 the corridor is: Standing Deposit Facility (SDF) rate = Repo - 25 bps (the floor, which absorbs surplus liquidity WITHOUT collateral), Repo (injects liquidity against government securities), and Marginal Standing Facility (MSF) = Repo + 25 bps (the ceiling, where banks can borrow overnight by dipping into their SLR holdings, within a prescribed limit of NDTL). Bank Rate is aligned with the MSF rate (it is used as a penal rate for CRR/SLR shortfalls and as a reference for some tax and legal interest rates). With repo at 5.50%: SDF 5.25%, MSF 5.75%, Bank Rate 5.75% - the same arrangement that followed the October 2026 policy, when the repo was raised 25 bps from 5.25% to 5.50%. The fixed-rate reverse repo (FRRR) continues as a separate liquidity absorption tool at the RBI's discretion but is not the floor; the SDF replaced it as the floor. [Recheck the October 2026 rates on rbi.org.in.]