UPSC Prelims Practice Questions — RBI raises daily cash reserve ratio requirement for banks

Q1. Under Section 42 of the Reserve Bank of India Act, 1934, as it now stands, which one of the following correctly describes the rate at which the RBI may prescribe the Cash Reserve Ratio for scheduled banks?

  • A. Any rate, but only with prior approval of the Central Government
  • B. Any rate within a statutory band of 3 per cent to 20 per cent
  • C. Any rate it considers necessary, with no statutory floor or ceiling
  • D. Any rate up to a statutory ceiling of 15 per cent of NDTL

Q2. With reference to the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) in India, consider the following statements: Which of the statements given above are correct?

  1. CRR is kept as balances with the RBI, whereas assets held for SLR stay on the bank's own books.
  2. Assets held for SLR can earn a return for the bank, unlike balances held for CRR.
  3. Gold held by a bank can be counted towards meeting its CRR requirement.
  4. Securities held for SLR can be used by a bank to borrow overnight from the RBI under the Marginal Standing Facility.
  • A. 1, 2 and 4 only
  • B. 1 and 2 only
  • C. 1, 2, 3 and 4
  • D. 2, 3 and 4 only

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. Raising the daily minimum CRR balance from 90 per cent to 99 per cent of the requirement reduces the liquidity that banks can use, even though the CRR rate itself is unchanged.
  2. Under fortnightly averaging, a lower daily minimum lets banks temporarily draw down their balances with the RBI and make up the shortfall on other days of the fortnight.
  • 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

Q4. Consider the following statements regarding the likely effects of raising banks' daily minimum CRR balance requirement while keeping the CRR rate unchanged: Which of the statements given above is/are correct?

  1. Banks' need to borrow in the overnight market around days of large single-day outflows, such as advance-tax payments, is likely to increase.
  2. Banks that used to lend surplus funds in the call market on days when their reserve balances were low will now have more to lend.
  • A. 1 only
  • B. 2 only
  • C. Both 1 and 2
  • D. Neither 1 nor 2

Q5. With reference to the division of monetary policy functions in India, consider the following statements: Which of the statements given above is/are correct?

  1. A change in the Cash Reserve Ratio rate requires a majority vote of the Monetary Policy Committee.
  2. The Monetary Policy Committee constituted under the RBI Act, 1934 determines the policy repo rate needed to achieve the inflation target.
  3. The RBI can change liquidity conditions in the banking system between two Monetary Policy Committee meetings without changing the policy repo rate.
  • A. 1 and 2 only
  • B. 3 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. A large and persistent liquidity surplus in the banking system tends to push the weighted average call rate towards the Marginal Standing Facility rate.
  2. Under the Liquidity Adjustment Facility, the Standing Deposit Facility rate forms the floor and the Marginal Standing Facility rate forms the ceiling of the corridor around the policy repo rate.
  • 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. Suppose the banking system has a large and persistent liquidity surplus, and the weighted average call rate is trading close to the SDF rate, well below the policy repo rate. If the RBI wants to bring the call rate back towards the repo rate without changing the repo rate, which one of the following actions would be most appropriate?

  • A. Purchasing government securities through open market operations
  • B. Conducting variable rate reverse repo auctions of suitable tenor
  • C. Reducing the cash reserve ratio in phased tranches
  • D. Conducting variable rate repo auctions of suitable tenor

Q8. Which of the following measures by the RBI would reduce liquidity in the banking system?

  1. Phased release of funds impounded under an incremental cash reserve ratio
  2. Raising the share of required CRR that banks must hold on a daily basis, with the CRR rate unchanged
  3. Imposing an incremental cash reserve ratio on the increase in banks' net demand and time liabilities over a specified period
  4. Outright sale of government securities through open market operations
  • A. 1, 3 and 4 only
  • B. 1 and 2 only
  • C. 2, 3 and 4 only
  • D. 1, 2, 3 and 4