UPSC Prelims Practice Questions — RBI mops up ₹6 lakh crore in 2 auctions with mixed response

Q1. With reference to the Variable Rate Reverse Repo (VRRR) auctions conducted by the Reserve Bank of India, consider the following statements: 1. A VRRR auction absorbs liquidity from the banking system, and the amount notified for each auction is decided by the Reserve Bank on an assessment of prevailing liquidity conditions. 2. Participation in the Liquidity Adjustment Facility, including its variable rate auctions, is open to all Scheduled Commercial Banks including Regional Rural Banks, as well as to Primary Dealers. 3. Funds absorbed under a VRRR auction are backed by the transfer of eligible government securities, unlike deposits placed under the Standing Deposit Facility. 4. Every VRRR auction is necessarily of overnight tenor, since fine-tuning operations under the Liquidity Adjustment Facility can never exceed one day. Which of the statements given above is/are correct?

  1. A VRRR auction absorbs liquidity from the banking system, and the amount notified for each auction is decided by the Reserve Bank on an assessment of prevailing liquidity conditions.
  2. Participation in the Liquidity Adjustment Facility, including its variable rate auctions, is open to all Scheduled Commercial Banks including Regional Rural Banks, as well as to Primary Dealers.
  3. Funds absorbed under a VRRR auction are backed by the transfer of eligible government securities, unlike deposits placed under the Standing Deposit Facility.
  4. Every VRRR auction is necessarily of overnight tenor, since fine-tuning operations under the Liquidity Adjustment Facility can never exceed one day.
  • A. 1 and 3 only
  • B. 2 and 4 only
  • C. 1, 2 and 3
  • D. 3 and 4 only

Q2. Consider the following statements comparing the fixed rate reverse repo with the Variable Rate Reverse Repo (VRRR) of the Reserve Bank of India: 1. Under the fixed rate reverse repo the rate is pre-announced by the Reserve Bank, whereas under a VRRR the rate is discovered through competitive bidding by participants. 2. The fixed rate reverse repo, which formerly served as the floor of the Liquidity Adjustment Facility corridor, was displaced from that role in April 2022. 3. Unlike the fixed rate reverse repo, a VRRR auction can be conducted only for tenors longer than fourteen days. Which of the statements given above is/are correct?

  1. Under the fixed rate reverse repo the rate is pre-announced by the Reserve Bank, whereas under a VRRR the rate is discovered through competitive bidding by participants.
  2. The fixed rate reverse repo, which formerly served as the floor of the Liquidity Adjustment Facility corridor, was displaced from that role in April 2022.
  3. Unlike the fixed rate reverse repo, a VRRR auction can be conducted only for tenors longer than fourteen days.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q3. Consider the following statements about the instruments used by the Reserve Bank of India for managing systemic liquidity: 1. The Marginal Standing Facility and the Standing Deposit Facility are standing facilities available on all days of the week throughout the year, whereas variable rate auctions are conducted at the discretion of the Reserve Bank. 2. Open Market Operations alter durable liquidity through the outright purchase or sale of government securities, whereas a Variable Rate Reverse Repo absorbs liquidity only for the tenor of the auction. 3. The Cash Reserve Ratio and the Statutory Liquidity Ratio are instruments of the Liquidity Adjustment Facility, and any change in either of them is decided exclusively by the Monetary Policy Committee. Which of the statements given above is/are correct?

  1. The Marginal Standing Facility and the Standing Deposit Facility are standing facilities available on all days of the week throughout the year, whereas variable rate auctions are conducted at the discretion of the Reserve Bank.
  2. Open Market Operations alter durable liquidity through the outright purchase or sale of government securities, whereas a Variable Rate Reverse Repo absorbs liquidity only for the tenor of the auction.
  3. The Cash Reserve Ratio and the Statutory Liquidity Ratio are instruments of the Liquidity Adjustment Facility, and any change in either of them is decided exclusively by the Monetary Policy Committee.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q4. Under the Reserve Bank of India's revised liquidity management framework, which one of the following is designated as the main liquidity management operation?

  • A. The overnight fixed rate reverse repo window, conducted on all weekdays as the sole absorption tool
  • B. The outright open market purchase of dated government securities, announced in every calendar month
  • C. The 14-day variable rate repo/reverse repo auction conducted on reporting Fridays
  • D. The marginal standing facility window, kept open on every day of the year for all LAF participants

Q5. The two auctions through which the Reserve Bank of India absorbed over ₹6 lakh crore from the banking system in September 2026 were conducted under which one of the following?

  • A. A resolution of the Monetary Policy Committee constituted under Section 45ZB of the Reserve Bank of India Act, 1934
  • B. The Liquidity Adjustment Facility, at the Reserve Bank's discretion outside the Monetary Policy Committee's rate-setting cycle
  • C. The Market Stabilisation Scheme, operated under a memorandum of understanding between the Government of India and the Reserve Bank
  • D. The Ways and Means Advances arrangement, extended by the Reserve Bank to the Government of India for temporary mismatches

Q6. With reference to the two Variable Rate Reverse Repo auctions conducted by the Reserve Bank of India on 7 September 2026, consider the following: 1. The thirty-day auction carried a notified amount of ₹7 lakh crore but drew bids of only about ₹2.59 lakh crore. 2. The overnight auction carried a notified amount of ₹5 lakh crore and drew bids of about ₹3.53 lakh crore. 3. The cut-off rate as well as the weighted average rate settled at 5.24 per cent in both the auctions. 4. Bids in the thirty-day auction exceeded the notified amount, compelling the Reserve Bank to accept only a part of them. Which of the above is/are correctly identified?

  1. The thirty-day auction carried a notified amount of ₹7 lakh crore but drew bids of only about ₹2.59 lakh crore.
  2. The overnight auction carried a notified amount of ₹5 lakh crore and drew bids of about ₹3.53 lakh crore.
  3. The cut-off rate as well as the weighted average rate settled at 5.24 per cent in both the auctions.
  4. Bids in the thirty-day auction exceeded the notified amount, compelling the Reserve Bank to accept only a part of them.
  • A. 1 and 4 only
  • B. 2, 3 and 4
  • C. 1, 2 and 3
  • D. 1, 3 and 4

Q7. The record surplus liquidity in the Indian banking system in early September 2026 has been attributed principally to which one of the following?

  • A. Large rupee inflows arising from the Reserve Bank's special foreign currency deposit and borrowing window for non-residents
  • B. A reduction in the Cash Reserve Ratio announced by the Monetary Policy Committee at its August 2026 meeting in Mumbai
  • C. Sustained outright open market purchases of dated government securities by the Reserve Bank through the second quarter
  • D. A sharp contraction in currency in circulation following the withdrawal of ₹2000 denomination banknotes from circulation

Q8. Consider the following statements regarding surplus liquidity conditions in the Indian banking system in 2026: 1. The special swap window for FCNR(B) deposits mobilised over $127 billion and was closed ahead of its originally announced schedule in August 2026. 2. Net liquidity in the banking system touched a record surplus of over ₹11 lakh crore in early September 2026. 3. The facility covering Overseas Foreign Currency Borrowings and External Commercial Borrowings under the same package was closed on the same day as the FCNR(B) window. 4. The Reserve Bank absorbed this surplus principally by raising the Statutory Liquidity Ratio applicable to scheduled commercial banks. Which of the above is/are NOT correct?

  1. The special swap window for FCNR(B) deposits mobilised over $127 billion and was closed ahead of its originally announced schedule in August 2026.
  2. Net liquidity in the banking system touched a record surplus of over ₹11 lakh crore in early September 2026.
  3. The facility covering Overseas Foreign Currency Borrowings and External Commercial Borrowings under the same package was closed on the same day as the FCNR(B) window.
  4. The Reserve Bank absorbed this surplus principally by raising the Statutory Liquidity Ratio applicable to scheduled commercial banks.
  • A. 1 and 2 only
  • B. 3 and 4 only
  • C. 2 and 3 only
  • D. 1, 3 and 4

Q9. As per the Reserve Bank of India's monetary policy position announced in August 2026, what is the width of the Liquidity Adjustment Facility corridor, measured from the Standing Deposit Facility rate to the Marginal Standing Facility rate?

  • A. 25 basis points
  • B. 50 basis points
  • C. 65 basis points
  • D. 90 basis points

Q10. Consider the following statements about the Reserve Bank of India's revised liquidity management framework of February 2020, under which variable rate auctions acquired their present role: 1. A 14-day variable rate repo/reverse repo auction, conducted on reporting Fridays, was designated the main liquidity management operation. 2. Fine-tuning operations of tenors ranging from overnight up to thirteen days were provided for, to be conducted at the Reserve Bank's discretion. 3. The amount to be notified for each main operation was to be fixed in advance for the year as a stated proportion of banks' net demand and time liabilities. 4. The revised framework was announced in early February 2020 and was brought into effect later the same month. Which of the above is/are correctly identified?

  1. A 14-day variable rate repo/reverse repo auction, conducted on reporting Fridays, was designated the main liquidity management operation.
  2. Fine-tuning operations of tenors ranging from overnight up to thirteen days were provided for, to be conducted at the Reserve Bank's discretion.
  3. The amount to be notified for each main operation was to be fixed in advance for the year as a stated proportion of banks' net demand and time liabilities.
  4. The revised framework was announced in early February 2020 and was brought into effect later the same month.
  • A. 1, 2 and 4
  • B. 1 and 3 only
  • C. 2, 3 and 4
  • D. 1 and 4 only

Q11. Which one of the following best describes the Standing Deposit Facility of the Reserve Bank of India?

  • A. An auction-based facility under which the Reserve Bank absorbs funds for tenors decided by it against transfer of government securities
  • B. An overnight window allowing banks to borrow from the Reserve Bank by dipping into their statutory liquidity holdings at a penal rate
  • C. A window through which the Reserve Bank absorbs durable liquidity by the outright sale of dated government securities to banks
  • D. An overnight uncollateralised deposit facility available to participants at a rate placed below the policy repo rate

Q12. In the context of India's monetary policy operating framework, the term 'Weighted Average Call Rate' refers to which one of the following?

  • A. The volume-weighted average rate at which banks lend to and borrow from one another in the uncollateralised overnight money market
  • B. The volume-weighted average rate at which the Reserve Bank lends overnight funds to Primary Dealers under the Liquidity Adjustment Facility
  • C. The amount-weighted average rate at which scheduled commercial banks price fresh rupee loans to their most creditworthy borrowers
  • D. The amount-weighted average yield at which the Reserve Bank issues Treasury Bills on behalf of the Government at its weekly auctions