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Home › Exam notes › UPSC Civil Services › Monetary Policy

Monetary Policy

Indian Economy

Useful for: UPSC Civil Services

हिंदी में पढ़ें

Overview

Monetary policy under flexible inflation targeting uses the policy repo rate and liquidity tools to keep CPI inflation near 4%.

Key points

  • The amended RBI Act (2016) created the six-member Monetary Policy Committee; the Governor has a casting vote.
  • The inflation target (4% CPI, band 2–6%) is set by the Central Government in consultation with the RBI, for five years.
  • The Standing Deposit Facility (April 2022) is the floor of the liquidity corridor; the Marginal Standing Facility is the ceiling.
  • CRR is a share of net demand and time liabilities kept with the RBI and earns no interest; SLR is held as liquid assets by banks.
  • Open market operations adjust durable liquidity.
  • Transmission improved with external-benchmark-linked lending (from October 2019).

Practice MCQs

  1. From the perspective of definition and scope, which one of the following statements about Monetary Policy is correct?

    1. Monetary Policy has no exceptions or limitations in exam analysis.
    2. Monetary policy influences liquidity, interest rates, credit conditions and inflation expectations.
    3. A policy-rate change instantly and fully changes every lending and deposit rate by the same amount.
    4. Monetary Policy is unrelated to institutions, processes or real-world applications.

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    Show answer

    Answer: (b) Monetary policy influences liquidity, interest rates, credit conditions and inflation expectations.. Monetary policy influences liquidity, interest rates, credit conditions and inflation expectations.

  2. Consider the following statements on Monetary Policy, focusing on definition and scope: 1. A policy-rate change instantly and fully changes every lending and deposit rate by the same amount. 2. Monetary policy influences liquidity, interest rates, credit conditions and inflation expectations. 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

    Read chapter notes · Similar questions

    Show answer

    Answer: (b) 2 only. Statement 2 is correct; Statement 1 is a common misconception.

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