UPSC Prelims Practice Questions — RBI raises repo rate to 5.5% amid ‘tightening’

Q1. With reference to the Liquidity Adjustment Facility (LAF) corridor of the Reserve Bank of India, consider the following statements: Which of the statements given above is/are correct?

  1. The Bank Rate is aligned with the policy repo rate, so the two always stand at the same level.
  2. Under the Marginal Standing Facility, banks can borrow overnight from the RBI by dipping into their statutory liquidity ratio holdings up to a limit.
  3. A 25 basis point increase in the policy repo rate shifts both the floor and the ceiling of the corridor upward by 25 basis points.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1, 2 and 3
  • D. 1 and 3 only

Q2. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. The Standing Deposit Facility has replaced the fixed rate reverse repo as the floor of the RBI's Liquidity Adjustment Facility corridor.
  2. Unlike the fixed rate reverse repo, the Standing Deposit Facility does not require the RBI to provide government securities as collateral, so the RBI's absorption of surplus liquidity is not constrained by its stock of securities.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q3. Suppose the Indian banking system faces a large and persistent liquidity deficit, and banks have exhausted the liquidity the RBI offers through its regular repo operations. Under the RBI's present operating framework, the overnight weighted average call money rate would then most likely trade close to which one of the following?

  • A. The policy repo rate
  • B. The Standing Deposit Facility rate
  • C. The fixed rate reverse repo rate
  • D. The Marginal Standing Facility rate

Q4. With reference to India's statutory framework of flexible inflation targeting, consider the following statements: Which of the statements given above are correct?

  1. The numerical inflation target is notified by the Central Government in consultation with the RBI, and not fixed by the Monetary Policy Committee itself.
  2. The three external members of the Monetary Policy Committee are nominated by the Government of India.
  3. If the Monetary Policy Committee's votes on the policy rate are evenly split, the RBI Governor's casting vote decides the outcome.
  4. The RBI Governor can set aside a policy rate decision taken by a majority of the Monetary Policy Committee members.
  • A. 1, 2 and 3 only
  • B. 2, 3 and 4 only
  • C. 1, 3 and 4 only
  • D. 1 and 2 only

Q5. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. Under India's flexible inflation targeting framework, CPI inflation of 5.8 per cent sustained for three consecutive quarters would not, by itself, oblige the RBI to send a report on failure to the Central Government.
  2. Failure under the framework is defined as a deviation of inflation from the 4 per cent central target, rather than from the tolerance band around it, for three consecutive quarters.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q6. Suppose CPI inflation in India averages 6.4 per cent, 6.7 per cent and 6.2 per cent in three successive quarters under the current inflation target of 4 per cent with a tolerance band of ±2 per cent. In this context, consider the following statements: Which of the statements given above is/are NOT correct?

  1. The RBI would be required to send a report to the Central Government setting out the reasons for the failure, the remedial actions proposed and an estimated time-frame for achieving the target.
  2. The Central Government would thereby acquire the power to direct the Monetary Policy Committee to raise the policy repo rate by a specified margin.
  3. Had average inflation in the middle quarter been 5.9 per cent instead, the statutory condition for failure would not have been met over these three quarters.
  • A. 1 and 3 only
  • B. 2 and 3 only
  • C. 2 only
  • D. 1 only

Q7. Suppose a sharp rise in global crude oil prices pushes up domestic fuel inflation in India. With reference to the monetary policy response under an inflation-targeting framework, consider the following statements: Which of the statements given above is/are correct?

  1. A higher policy repo rate can reverse the initial rise in fuel prices by curbing domestic demand.
  2. The case for tightening becomes stronger if the price rise persists and begins to raise inflation expectations and the prices of non-fuel goods and services.
  3. Because the shock originates on the supply side, the central bank should necessarily look through it, regardless of how persistent it turns out to be.
  • A. 1 and 3 only
  • B. 2 and 3 only
  • C. 2 only
  • D. 1 only

Q8. Consider the following assertion: The RBI's decision in October 2026 to begin a rate-hike cycle was justified even though the inflationary pressure was largely traced to energy and food prices. Which of the following statements support the above assertion?

  1. Domestic growth momentum was assessed as strong and broad-based, so the output cost of tightening was judged bearable.
  2. Rising bond yields in advanced economies and an appreciating US dollar had made financial markets fragile, raising the risk of capital outflows and imported inflation.
  3. Global growth was projected to slow in 2026, reducing the risk of demand-driven inflation from abroad.
  4. A higher domestic policy rate directly lowers the international prices of energy and food.
  • A. 1 and 2 only
  • B. 1, 2 and 3 only
  • C. 1, 3 and 4 only
  • D. 2 and 4 only