This set covers money supply measures, the tools the RBI uses to run monetary policy, and the structure of Indian banking. Questions focus on concepts, since rate values change often and are rarely tested directly.
How to practise: read each question and tap the option you think is correct. You will see right away whether you got it, along with a short explanation, and your score is tracked at the bottom of the screen. This set has 15 questions.
Topics covered in this set
- Money supply measures M0, M1 and M3
- CRR and SLR
- Repo, MSF and Standing Deposit Facility
- Open market operations and qualitative tools
- Monetary Policy Committee
- Bank nationalisation, payments banks and NPAs
UPSC Economy MCQs with answers and explanations
Q1. Narrow money (M1) in India consists of:
a) Currency with the public, demand deposits with banks and other deposits with the RBI
b) M1 plus time deposits with banks
c) Currency in circulation plus bankers' deposits with the RBI
d) Currency with the public plus post office savings deposits only
Q2. Which of the following is known as high-powered money?
a) M1
b) M3
c) Reserve money (M0)
d) M2
Q3. Which measure of money supply is the most liquid?
a) M3
b) M1
c) M4
d) M2
Q4. Which of the following statements about the Cash Reserve Ratio (CRR) is correct?
a) It is kept by banks in the form of government securities
b) It is kept by banks with the RBI as cash balances on which no interest is paid
c) It applies only to cooperative banks
d) It is a qualitative tool of credit control
Q5. Which of the following assets can be held by banks to meet the Statutory Liquidity Ratio (SLR)?
a) Corporate equity shares
b) Real estate
c) Gold
d) Loans given to industry
Q6. The repo rate is the rate at which:
a) Banks lend to each other in the call money market
b) The RBI lends to banks for short periods against government securities
c) Banks lend to their best customers
d) The RBI pays interest on CRR balances
Q7. What is the likely effect of an increase in the Cash Reserve Ratio?
a) Liquidity in the banking system falls
b) Lending capacity of banks rises
c) The money multiplier rises
d) Government borrowing falls automatically
Q8. Which of the following is correct about the Marginal Standing Facility (MSF)?
a) It is priced below the reverse repo rate
b) It is used by the RBI to absorb surplus liquidity
c) It allows banks to borrow overnight from the RBI, including by dipping into their SLR holdings up to a limit
d) It is available only to foreign banks
Q9. The Standing Deposit Facility (SDF) introduced by the RBI allows it to:
a) Absorb surplus liquidity from banks without giving government securities as collateral
b) Lend to banks without any collateral
c) Buy foreign currency from exporters
d) Fix interest rates on bank deposits
Q10. When the RBI buys government securities through open market operations, it:
a) Reduces liquidity in the banking system
b) Increases liquidity in the banking system
c) Raises the CRR
d) Reduces the fiscal deficit
Q11. A loan account in India is generally classified as a Non-Performing Asset when interest or principal remains overdue for more than:
a) 30 days
b) 60 days
c) 180 days
d) 90 days
Q12. Which of the following statements about the Monetary Policy Committee (MPC) is correct?
a) It is chaired by the Union Finance Minister
b) All its members are RBI officials
c) It decides the Statutory Liquidity Ratio
d) It has six members and the RBI Governor has a casting vote in case of a tie
Q13. In 1969, how many major commercial banks were nationalised in India?
a) 6
b) 20
c) 27
d) 14
Q14. Which of the following is a feature of payments banks in India?
a) They can issue credit cards
b) They can give loans to small businesses
c) They can accept deposits but cannot lend
d) They can accept unlimited deposits from foreign residents
Q15. Which of the following is a qualitative (selective) tool of credit control?
a) Cash Reserve Ratio
b) Open market operations
c) Bank rate
d) Margin requirements on loans
Quick revision notes
- M1 = currency with public + demand deposits + other deposits with RBI; M3 = M1 + time deposits.
- Reserve money (M0) is called high-powered money.
- CRR is kept as cash with the RBI and earns no interest; SLR is kept by banks in cash, gold or approved securities.
- MSF is priced above the repo rate and SDF forms the floor of the LAF corridor.
- The MPC has six members and sets the policy repo rate; the Governor has a casting vote.
- A loan becomes an NPA when dues remain unpaid for more than 90 days.
Frequently asked questions
What is the difference between CRR and SLR?
CRR is kept with the RBI in cash and earns no interest. SLR is kept by banks themselves in liquid assets such as gold and government securities, and these securities earn interest.
What are quantitative and qualitative tools of monetary policy?
Quantitative tools such as repo, CRR and open market operations affect the overall volume of credit. Qualitative tools such as margin requirements and moral suasion influence the direction of credit to particular sectors.
Why should UPSC aspirants not memorise current policy rates?
Rates such as repo and CRR change frequently and questions usually test how the tools work. Understanding the effect of raising or lowering a tool is more useful than remembering its current value.
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