UPSC Prelims Practice Questions — RBI may deliver two rate hikes by end of CY26, say analysts

Q1. Consider the following statements regarding the statutory Monetary Policy Committee (MPC) as compared with the arrangement that preceded it: 1. Before the amendment of the Reserve Bank of India Act, 1934, interest rate decisions rested with the Governor, who was advised by a committee whose advice was not binding; the provisions constituting the statutory MPC were brought into force in June 2016. 2. The MPC consists of six members, of whom three are from the Reserve Bank and three are appointed by the Central Government, with the Governor as ex officio Chairperson. 3. Unlike the earlier advisory body, whose members served at the Governor's pleasure, the members of the MPC appointed by the Central Government hold office for a term of four years and are eligible for re-appointment for one further term. Which of the statements given above is/are correct?

  1. Before the amendment of the Reserve Bank of India Act, 1934, interest rate decisions rested with the Governor, who was advised by a committee whose advice was not binding; the provisions constituting the statutory MPC were brought into force in June 2016.
  2. The MPC consists of six members, of whom three are from the Reserve Bank and three are appointed by the Central Government, with the Governor as ex officio Chairperson.
  3. Unlike the earlier advisory body, whose members served at the Governor's pleasure, the members of the MPC appointed by the Central Government hold office for a term of four years and are eligible for re-appointment for one further term.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q2. Under the framework governing the Monetary Policy Committee, what constitutes the quorum for its meeting?

  • A. Three members, of whom at least one must be the Governor
  • B. Four members, of whom at least one must be the Governor
  • C. Five members, of whom at least two must be members appointed by the Central Government
  • D. Six members, that is, the full strength of the Committee

Q3. Which one of the following presently constitutes the floor of the Reserve Bank of India's liquidity adjustment facility (LAF) corridor?

  • A. The fixed reverse repo rate available to banks under the LAF
  • B. The standing deposit facility (SDF) rate offered by the Reserve Bank
  • C. The marginal standing facility (MSF) rate charged by the Reserve Bank
  • D. The policy repo rate announced by the Monetary Policy Committee

Q4. In the Reserve Bank of India's terminology, the Bank Rate is best described as which one of the following?

  • A. The rate at which the Reserve Bank lends overnight funds to banks against government securities held within their statutory liquidity ratio requirement
  • B. The rate at which the Reserve Bank absorbs uncollateralised overnight deposits from banks without providing government securities in exchange
  • C. The rate at which the Reserve Bank stands ready to buy or rediscount bills of exchange or other commercial paper
  • D. The weighted average rate at which banks lend to one another overnight in the uncollateralised call money market

Q5. Under which one of the following provisions of the Reserve Bank of India Act, 1934 does the Central Government, in consultation with the Reserve Bank, determine the inflation target in terms of the consumer price index once in every five years?

  • A. Section 45ZB
  • B. Section 45ZA
  • C. Section 45ZI
  • D. Section 45ZN

Q6. Consider the following statements about successive notifications of India's inflation target: 1. The target of 4 per cent consumer price index inflation with a tolerance band of +/- 2 per cent was first notified on August 5, 2016, for the period ending March 31, 2021. 2. In the first review, carried out in March 2021, the 4 per cent target was retained but the tolerance band was narrowed to +/- 1 per cent for the succeeding five years. 3. In the second review, carried out in March 2026, the Central Government retained both the 4 per cent target and the +/- 2 per cent tolerance band for the period April 1, 2026 to March 31, 2031. Which of the statements given above is/are correct?

  1. The target of 4 per cent consumer price index inflation with a tolerance band of +/- 2 per cent was first notified on August 5, 2016, for the period ending March 31, 2021.
  2. In the first review, carried out in March 2021, the 4 per cent target was retained but the tolerance band was narrowed to +/- 1 per cent for the succeeding five years.
  3. In the second review, carried out in March 2026, the Central Government retained both the 4 per cent target and the +/- 2 per cent tolerance band for the period April 1, 2026 to March 31, 2031.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q7. Consider the following pairings of a Monetary Policy Committee decision with the action taken on the policy repo rate: 1. February 2025 — reduced by 25 basis points to 6.25 per cent 2. June 2025 — reduced by 50 basis points to 5.50 per cent 3. December 2025 — reduced by 50 basis points to 5.25 per cent 4. August 2026 — reduced by 25 basis points to 5.00 per cent Which of the above pairings is/are NOT correct?

  1. February 2025 — reduced by 25 basis points to 6.25 per cent
  2. June 2025 — reduced by 50 basis points to 5.50 per cent
  3. December 2025 — reduced by 50 basis points to 5.25 per cent
  4. August 2026 — reduced by 25 basis points to 5.00 per cent
  • A. 1 and 2
  • B. 2 and 3 only
  • C. 3 and 4
  • D. 1 and 4 only

Q8. In the Reserve Bank's monetary policy statements, which one of the following does the expression 'core inflation' denote?

  • A. Consumer price inflation of the rural sector alone, compiled separately from the urban sector
  • B. Headline consumer price inflation after excluding only the 'fuel and light' group of the index
  • C. Wholesale Price Index inflation after excluding primary articles and the fuel group
  • D. Headline consumer price inflation after excluding the 'food and beverages' and 'fuel and light' groups

Q9. In September 2026, analysts projecting two 25 basis point repo rate hikes in October and December 2026 identified which one of the following as the immediate trigger strengthening that case?

  • A. The Monetary Policy Committee's shift from a neutral stance to an accommodative stance at its August 2026 meeting
  • B. The Central Government's decision in March 2026 to lower the consumer price index inflation target below 4 per cent
  • C. The reduction of the policy repo rate by 25 basis points by the Monetary Policy Committee in August 2026
  • D. The US Federal Reserve's rate hike and a dot plot signalling a further increase during 2026

Q10. What is the minimum frequency with which the Monetary Policy Committee is required by law to meet?

  • A. Six times in a year, corresponding to the bi-monthly policy cycle
  • B. Twelve times in a year, once in each calendar month
  • C. Four times in a year
  • D. Eight times in a year, as determined by the Central Board of the Reserve Bank

Q11. Consider the following descriptions of monetary policy stances used by the Monetary Policy Committee: 1. Accommodative — the Committee signals that it is open to either reducing the policy repo rate or holding it, while a hike is effectively ruled out in the near term. 2. Neutral — the Committee retains the flexibility to move the policy repo rate in either direction, depending on incoming data. 3. Calibrated tightening — a rate cut is off the table, and the policy repo rate may be raised at some meetings but not necessarily at every meeting. 4. Withdrawal of accommodation — the Committee is obliged to raise the policy repo rate at every subsequent meeting until the inflation target is achieved. Which of the above is/are correctly identified?

  1. Accommodative — the Committee signals that it is open to either reducing the policy repo rate or holding it, while a hike is effectively ruled out in the near term.
  2. Neutral — the Committee retains the flexibility to move the policy repo rate in either direction, depending on incoming data.
  3. Calibrated tightening — a rate cut is off the table, and the policy repo rate may be raised at some meetings but not necessarily at every meeting.
  4. Withdrawal of accommodation — the Committee is obliged to raise the policy repo rate at every subsequent meeting until the inflation target is achieved.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1, 2 and 3
  • D. 1, 2, 3 and 4

Q12. Consider the following global developments cited in September 2026 in relation to India's monetary policy outlook: 1. Brent crude rising to about $108 a barrel as tensions disrupted shipping through the Strait of Hormuz and the Red Sea. 2. The US Federal Reserve raising its policy target range by 25 basis points to 3.75-4.00 per cent, its first increase since July 2023, with its median projection showing no further increase during 2026. 3. Downward pressure on the rupee, which slipped past the 96-per-dollar level. 4. The Federal Reserve's median forecast of headline PCE inflation at 3.7 per cent for 2026, well above its 2 per cent target. Which of the statements given above is/are correct?

  1. Brent crude rising to about $108 a barrel as tensions disrupted shipping through the Strait of Hormuz and the Red Sea.
  2. The US Federal Reserve raising its policy target range by 25 basis points to 3.75-4.00 per cent, its first increase since July 2023, with its median projection showing no further increase during 2026.
  3. Downward pressure on the rupee, which slipped past the 96-per-dollar level.
  4. The Federal Reserve's median forecast of headline PCE inflation at 3.7 per cent for 2026, well above its 2 per cent target.
  • A. 1 and 2 only
  • B. 1, 3 and 4
  • C. 2 and 3 only
  • D. 1, 2, 3 and 4