UPSC Prelims Practice Questions — Stock markets snap three-day rally on policy rate hike fears

Q1. With reference to India's flexible inflation targeting framework, consider the following statements: Which of the statements given above is/are correct?

  1. The inflation target is notified by the Central Government in consultation with the Reserve Bank of India, and is not set by the Monetary Policy Committee itself.
  2. A single monthly CPI reading above 6 per cent, such as that recorded for October 2026, by itself amounts to a failure to meet the inflation target.
  3. When the target is failed, the RBI must report to the Central Government the reasons for the failure and the remedial actions it proposes.
  • A. 1, 2 and 3
  • B. 2 and 3 only
  • C. 1 and 2 only
  • D. 1 and 3 only

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

  1. When all six members of the Monetary Policy Committee are present and voting, the three external members voting together cannot carry a decision against the three RBI members.
  2. The external members of the Monetary Policy Committee are appointed by the Central Government.
  • 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. At a meeting of the RBI's Monetary Policy Committee, five members are present, one external member being absent. Two external members and the Deputy Governor vote to raise the policy repo rate by 25 basis points, while the Governor and the RBI officer nominated by the Central Board vote to keep it unchanged. What would be the outcome of this meeting?

  • A. The rate is raised, as most of the members present and voting backed the increase
  • B. The rate is unchanged, as the Governor's vote prevails over that of other members
  • C. The rate is unchanged, as any decision needs backing from four of the six members
  • D. No decision is valid, as every member of the committee must be present to vote

Q4. Suppose the RBI raises the policy repo rate by 25 basis points. With reference to the transmission of this change to bank lending rates, consider the following statements: Which of the statements given above is/are correct?

  1. Floating-rate retail loans benchmarked to the repo rate would be reset upward at their next periodic reset, without waiting for banks to revise their internal cost of funds.
  2. Floating-rate loans still priced off banks' internal benchmarks would generally see a slower pass-through than externally benchmarked loans.
  3. Fixed-rate loans disbursed before the hike would also be repriced upward at once, since the repo rate serves as the anchor for all bank lending.
  • A. 1 and 3 only
  • B. 1, 2 and 3
  • C. 1 and 2 only
  • D. 2 and 3 only

Q5. Consider the following facts reported for 13 November 2026: October 2026 CPI inflation was 6.09 per cent; no change in the policy repo rate was announced that day; the Sensex fell as much as 0.75 per cent during the session and closed 0.39 per cent lower; the decline was attributed to fears of a policy rate hike in December. Which of the following inferences can be drawn from the above?

  1. Equity investors were reacting to an anticipated change in monetary policy rather than to an actual one.
  2. The rise in October CPI inflation was driven by imported energy prices linked to tensions in West Asia.
  3. The RBI is legally bound to raise the policy repo rate at its December 2026 meeting.
  • A. 1 and 2 only
  • B. 1 only
  • C. 1, 2 and 3
  • D. 2 and 3 only

Q6. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. India's benchmark equity indices declined on 13 November 2026 even though the RBI had not changed the policy repo rate on that day.
  2. Share prices reflect the discounted value of expected future earnings, so an anticipated rise in interest rates tends to lower them even before the rate is actually changed.
  • 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

Q7. With reference to the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) in India, consider the following statements: Which of the statements given above is/are correct?

  1. India's inflation target is defined in terms of the WPI, because wholesale prices register inflationary pressure earlier in the supply chain.
  2. The CPI basket includes the prices of services consumed by households, whereas the WPI basket is made up of goods such as primary articles, fuel and power, and manufactured products.
  3. A sharp rise in vegetable prices shows up in both the CPI and the WPI, since primary food articles form part of both baskets.
  • A. 1 only
  • B. 1, 2 and 3
  • C. 1 and 3 only
  • D. 2 and 3 only

Q8. On a trading day, Index P, standing at 80,000, falls by 400 points, while Index Q, standing at 25,000, falls by 150 points. Which one of the following is the correct assessment of their performance that day?

  • A. Q fell by a larger proportion, although P lost more points
  • B. Both fell by the same proportion, as both track one market
  • C. No comparison is possible without the count of index stocks
  • D. P fell by a larger proportion, as it lost more points than Q