UPSC Indian Economy – Chapter 9: RBI and Monetary Policy (29 MCQs)
UPSC Indian Economy – Chapter 9: RBI and Monetary Policy (29 MCQs) – 28 questions, subject: Indian Economy. Every question has the correct answer with a one-line explanation; tap "Show Answer". Free practice for TNPSC, UPSC, SSC, Bank and RRB exams – Shanmugam IAS Academy, Coimbatore.
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The Reserve Bank of India was nationalised on:
Correct Answer: A [1 January 1949]
Explanation:
Under the RBI (Transfer to Public Ownership) Act, 1948, the shareholders' bank became fully state-owned on 1 January 1949.
The inflation target notified for 1 April 2026 to 31 March 2031 is:
Correct Answer: C [4 per cent with a band of 2–6 per cent]
Explanation:
retained.
Which one of the following is the floor of the RBI's liquidity corridor?
Correct Answer: B [Standing Deposit Facility]
Explanation:
Since April 2022 the SDF, 25 basis points below repo, absorbs surplus funds without collateral and forms the corridor's floor.
If the repo rate is 5.50 per cent and the corridor is symmetric with a width of 50 basis points, the MSF rate is:
Correct Answer: B [5.75 per cent]
Explanation:
25 bps above.
Consider the following statements about the MPC:
1. It has six members, three of whom are appointed by the Central Government.
2. The Governor has a casting vote in case of a tie.
3. Its minutes are published on the 14th day after the meeting.
Which of the statements given above are correct?
Correct Answer: D [1, 2 and 3]
Explanation:
All three hold: six members with three external Government appointees, a casting vote for the Governor, and minutes on the 14th day.
In October 2026 the MPC:
Correct Answer: D [raised the repo rate to 5.50 per cent]
Explanation:
by 25 bps; stance changed to calibrated tightening.
Flexible inflation targeting in India was recommended by:
Correct Answer: A [the Urjit Patel Committee]
Explanation:
2014.
The Statutory Liquidity Ratio is prescribed under:
Correct Answer: C [the Banking Regulation Act, Section 24]
Explanation:
Section 24 of the Banking Regulation Act, 1949 requires banks to keep liquid assets – the SLR, now 18 per cent of NDTL.
To neutralise the rupee liquidity created by its purchase of foreign exchange, the RBI would most likely:
Correct Answer: D [sell government securities]
Explanation:
sterilisation through OMOs.
New floating-rate retail and MSE loans have had to be linked to an external benchmark since:
Correct Answer: A [1 October 2019]
Explanation:
From 1 October 2019 banks had to link new floating-rate retail and MSE loans to an external benchmark such as the repo rate.
If the repo rate is 5.50 per cent and expected inflation is 5.2 per cent, the approximate real policy rate is:
Correct Answer: C [0.3 per cent]
Explanation:
5.50 − 5.2.
Which of the following is a qualitative tool of monetary policy?
Correct Answer: B [Moral suasion]
Explanation:
Moral suasion is persuasion by the RBI without changing rates or quantities of money, so it is a qualitative tool.
The Contingent Risk Buffer maintained by the RBI while approving the surplus transfer for 2025-26 was:
Correct Answer: D [6.5 per cent of its balance sheet]
Explanation:
On 22 May 2026 the Central Board approved the 2025-26 surplus transfer while keeping the CRB at 6.5 per cent of the balance sheet.
Under the flexible inflation targeting law, the RBI must report to the Government if average inflation is outside the band for:
Correct Answer: D [three consecutive quarters]
Explanation:
first triggered in 2022.
Assertion (A): Transmission of policy-rate changes to bank lending rates has been slow in India.
Reason (R): Banks fund themselves largely through fixed-rate term deposits whose rates change only when they mature.
Correct Answer: A [Both A and R are true, and R is the correct explanation of A]
Explanation:
R explains A.
Which of the following are functions of the RBI?
1. Banker to the Central Government
2. Lender of last resort to banks
3. Regulator of payment and settlement systems
Select the correct answer:
Correct Answer: C [1, 2 and 3]
Explanation:
The RBI is banker to the Centre, lender of last resort to banks, and regulator of payment systems under the 2007 Act.
The Market Stabilisation Scheme, introduced in 2004, is used to:
Correct Answer: B [absorb surplus liquidity arising from capital inflows]
Explanation:
Under the MSS the Government issues securities to absorb surplus liquidity from capital inflows, and the proceeds stay with the RBI.
Arrange the following in chronological order:
1. MCLR introduced
2. Monetary Policy Framework Agreement signed
3. External benchmark lending rate mandated
4. Standing Deposit Facility introduced
Correct Answer: B [2-1-3-4]
Explanation:
2015, 2016, 2019, 2022.
A State raises most of its market borrowing through:
Correct Answer: C [State Development Loans auctioned by the RBI]
Explanation:
States raise most market loans through State Development Loans, which the RBI auctions as their debt manager by agreement.
Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?
Correct Answer: A [Conducting 'Open Market Operations']
Explanation:
OMOs absorb the liquidity created by forex purchases.
With reference to the Indian economy, consider the following statements:
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?
Correct Answer: B [2 and 3 only]
Explanation:
Selling dollars supports a falling rupee, and lower US or EU rates bring dollar inflows the RBI may buy; statement 1 is false.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
Correct Answer: D [Reserve Bank of India]
Explanation:
The amended RBI Act makes price stability, while keeping growth in mind, the RBI's monetary policy objective through inflation targeting.
In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?
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:
Correct Answer: B [2 only]
Explanation:
Lender of last resort means the central bank providing emergency liquidity to banks facing a temporary crisis.
Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below:
Correct Answer: D [1, 2 and 3]
Explanation:
US Fed actions move capital flows, RBI actions move rates and liquidity, and inflation and short-term rates shape yields – all three matter.
If the RBI decides to adopt an expansionist monetary policy, which of the following it would not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
Correct Answer: B [2 only]
Explanation:
raising the MSF is contractionary.
Which of the following statements is/are correct regarding the 'Monetary Policy Committee (MPC)'?
1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:
Correct Answer: A [1 only]
Explanation:
The MPC decides the policy repo rate; it has six members, not twelve, and is chaired by the Governor, not the Finance Minister.
In the context of Indian economy, 'Open Market Operations' refers to:
Correct Answer: C [purchase and sale of government securities by the RBI]
Explanation:
OMOs are the RBI's outright purchase and sale of government securities to inject or absorb liquidity.
An increase in the Bank Rate generally indicates that the
Correct Answer: D [Central Bank is following a tight money policy]
Explanation:
A higher Bank Rate makes central bank credit dearer, signalling a tight money policy to restrain credit and inflation.
➤ Full notes, maps, tables, a reason for every option and Mains PYQs – U15 · Indian Economy (UPSC book, ₹249): www.shanmugamiasacademy.in/study-materials/upsc-indian-economy
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