UPSC Prelims Practice Questions — India’s real rate moment, the cost of delay

Q1. Consider the following statements regarding real interest rates: 1. The real interest rate relevant for forward-looking monetary policy is always measured as the nominal policy rate minus the inflation actually realised over the preceding twelve months. 2. Under the Fisher relation, the real rate equals the nominal rate minus expected inflation, so an equal rise in both the nominal rate and expected inflation leaves the real rate unchanged. 3. If realised inflation turns out to be higher than what was expected, the ex-post real rate for that period will be lower than the ex-ante real rate. Which of the statements given above is/are correct?

  1. The real interest rate relevant for forward-looking monetary policy is always measured as the nominal policy rate minus the inflation actually realised over the preceding twelve months.
  2. Under the Fisher relation, the real rate equals the nominal rate minus expected inflation, so an equal rise in both the nominal rate and expected inflation leaves the real rate unchanged.
  3. If realised inflation turns out to be higher than what was expected, the ex-post real rate for that period will be lower than the ex-ante real rate.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q2. Under the Reserve Bank of India Act, 1934, the nominal policy anchor from which India's real policy rate is derived — the policy repo rate required to achieve the notified inflation target — is determined by which one of the following?

  • A. The Central Board of Directors of the Reserve Bank of India, on the recommendation of the Governor
  • B. The Monetary Policy Committee constituted by the Central Government by notification in the Official Gazette
  • C. The Financial Stability and Development Council chaired by the Union Finance Minister
  • D. The Department of Economic Affairs in the Ministry of Finance, in consultation with the Reserve Bank

Q3. In the event of an equality of votes in a meeting of India's Monetary Policy Committee, the second or casting vote vests in which one of the following?

  • A. The Deputy Governor of the Reserve Bank in charge of monetary policy
  • B. The officer of the Reserve Bank nominated to the Committee by its Central Board
  • C. The Governor of the Reserve Bank of India, who is its ex officio Chairperson
  • D. The senior-most of the three members appointed by the Central Government

Q4. Under the Reserve Bank of India Act, 1934, what is the quorum prescribed for a meeting of the Monetary Policy Committee?

  • A. Three members
  • B. Four members
  • C. Five members
  • D. Six members, i.e. the full Committee

Q5. Under the criteria notified by the Central Government, a failure to achieve the inflation target is deemed to have occurred when average inflation stays beyond a tolerance level for a minimum of how many consecutive quarters?

  • A. Two consecutive quarters
  • B. Three consecutive quarters
  • C. Four consecutive quarters
  • D. Six consecutive quarters

Q6. Which one of the following correctly describes the inflation target notified by the Central Government in its review of March 25, 2026 under Section 45ZA of the Reserve Bank of India Act, 1934?

  • A. 4 per cent Consumer Price Index inflation, with a tolerance band of 2 to 6 per cent, for the period April 1, 2026 to March 31, 2031
  • B. 4 per cent Consumer Price Index inflation, with a tolerance band of 2 to 6 per cent, for the period April 1, 2026 to March 31, 2029
  • C. 5 per cent Consumer Price Index inflation, with a tolerance band of 3 to 7 per cent, for the period April 1, 2026 to March 31, 2031
  • D. 4 per cent Wholesale Price Index inflation, with a tolerance band of 2 to 6 per cent, for the period April 1, 2026 to March 31, 2031

Q7. With reference to the Monetary Policy Committee resolution of August 5, 2026 as compared with the preceding policy, consider the following statements: 1. The policy repo rate under the liquidity adjustment facility was kept unchanged at 5.25 per cent, and consequently the standing deposit facility rate remained at 5.00 per cent. 2. The Committee shifted its stance from 'neutral' to 'accommodative' in view of the near-zero real policy rate. 3. CPI inflation for 2026-27 was projected at about 5 per cent, with headline inflation expected to peak in the third quarter of 2026-27 before moderating. Which of the statements given above is/are correct?

  1. The policy repo rate under the liquidity adjustment facility was kept unchanged at 5.25 per cent, and consequently the standing deposit facility rate remained at 5.00 per cent.
  2. The Committee shifted its stance from 'neutral' to 'accommodative' in view of the near-zero real policy rate.
  3. CPI inflation for 2026-27 was projected at about 5 per cent, with headline inflation expected to peak in the third quarter of 2026-27 before moderating.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q8. In the Monetary Policy Committee's resolution of August 5, 2026, how many of the six members voted in favour of keeping the policy repo rate unchanged?

  • A. Three members, with the decision carried by the Governor's casting vote
  • B. Four members, the remaining two voting for a rate increase
  • C. Five members, with one member dissenting in favour of a cut
  • D. All six members, the decision being unanimous

Q9. Consider the following statements regarding retail inflation in India in August 2026 as compared with July 2026: 1. Headline CPI inflation rose to 4.82 per cent in August 2026 from 4.45 per cent in July 2026, remaining above the Reserve Bank's 4 per cent target. 2. Inflation measured by the Consumer Food Price Index rose to 5.95 per cent in August 2026 from 5.52 per cent in July 2026. 3. In August 2026 urban inflation stood higher than rural inflation, both having risen over their July 2026 levels. Which of the statements given above is/are correct?

  1. Headline CPI inflation rose to 4.82 per cent in August 2026 from 4.45 per cent in July 2026, remaining above the Reserve Bank's 4 per cent target.
  2. Inflation measured by the Consumer Food Price Index rose to 5.95 per cent in August 2026 from 5.52 per cent in July 2026.
  3. In August 2026 urban inflation stood higher than rural inflation, both having risen over their July 2026 levels.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q10. Consider the following statements comparing the Reserve Bank of India's monetary policy instruments: 1. The standing deposit facility absorbs liquidity from banks without any collateral, whereas under the marginal standing facility banks borrow overnight against eligible securities. 2. The Bank Rate is aligned with the marginal standing facility rate, and in August 2026 both stood at 5.50 per cent. 3. The standing deposit facility rate is placed below the policy repo rate and the marginal standing facility rate above it, forming the floor and the ceiling of the corridor respectively. Which of the statements given above is/are correct?

  1. The standing deposit facility absorbs liquidity from banks without any collateral, whereas under the marginal standing facility banks borrow overnight against eligible securities.
  2. The Bank Rate is aligned with the marginal standing facility rate, and in August 2026 both stood at 5.50 per cent.
  3. The standing deposit facility rate is placed below the policy repo rate and the marginal standing facility rate above it, forming the floor and the ceiling of the corridor respectively.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q11. Which one of the following correctly states the agencies responsible for compiling India's Consumer Price Index and Wholesale Price Index?

  • A. The Consumer Price Index is compiled by the Office of the Economic Adviser, DPIIT, and the Wholesale Price Index by the National Statistical Office under the Ministry of Statistics and Programme Implementation
  • B. Both indices are compiled by the National Statistical Office under the Ministry of Statistics and Programme Implementation, which also released the new Producer Price Indices in June 2026
  • C. The Consumer Price Index is compiled by the National Statistical Office under the Ministry of Statistics and Programme Implementation, and the Wholesale Price Index by the Office of the Economic Adviser, DPIIT, Ministry of Commerce and Industry
  • D. The Consumer Price Index is compiled by the Department of Consumer Affairs, and the Wholesale Price Index by the Office of the Economic Adviser, DPIIT, Ministry of Commerce and Industry

Q12. Should a prolonged near-zero real policy rate allow average CPI inflation to remain beyond the notified tolerance band for the period prescribed under the Reserve Bank of India Act, 1934, the Reserve Bank is required to submit a report setting out the reasons for the failure and the remedial actions proposed, to which one of the following?

  • A. Both Houses of Parliament, through a statement laid by the Union Finance Minister
  • B. The Central Government
  • C. The Monetary Policy Committee, which then reviews the framework
  • D. The Financial Stability and Development Council