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Indian EconomyHard

The cash reserve ratio that banks must maintain with the Reserve Bank is prescribed under

  1. A.Section 42 of the Reserve Bank of India Act, 1934
  2. B.Section 24 of the Banking Regulation Act, 1949
  3. C.Section 22 of the Reserve Bank of India Act, 1934
  4. D.The Foreign Exchange Management Act, 1999

Correct answer

A. Section 42 of the Reserve Bank of India Act, 1934

Explanation

The correct answer is A, Section 42 of the Reserve Bank of India Act, 1934. It requires every scheduled bank to keep with the Reserve Bank a cash balance calculated on its net demand and time liabilities, and this proportion is the cash reserve ratio. Since the amendment of 2006 the Bank may set the ratio without any statutory floor or ceiling.

Option B, Section 24 of the Banking Regulation Act, 1949, prescribes the statutory liquidity ratio, the share of liabilities that a bank must hold in cash, gold and approved securities with itself, and the pairing of the two sections is the favourite trap in banking papers. Option C, Section 22 of the Reserve Bank of India Act, gives the Bank the sole right of note issue. Option D governs dealings in foreign exchange and has nothing to do with reserve requirements.

Read the full article: RBI and Monetary Policy: Functions, MPC and Credit Control

Practice Questions

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Q2.Indian EconomyEasy

The Reserve Bank of India was nationalised with effect from

  1. A.1 April 1935
  2. B.1 January 1949
  3. C.15 August 1947
  4. D.19 July 1969
Show answer
Correct answer: B. 1 January 1949

The Bank began as a shareholders' institution, and the Reserve Bank (Transfer to Public Ownership) Act, 1948 transferred its shares to the central government with effect from the first day of 1949, since when it has been fully owned by the Government of India.

Q3.Indian EconomyEasy

The repo rate is the rate at which

  1. A.Commercial banks park their surplus funds with the Reserve Bank
  2. B.The Reserve Bank lends short term funds to commercial banks against government securities
  3. C.A bank lends to its most creditworthy customers
  4. D.The government borrows from the open market
Show answer
Correct answer: B. The Reserve Bank lends short term funds to commercial banks against government securities

In a repurchase agreement a bank sells government securities to the Reserve Bank and agrees to buy them back the next day at a fixed price; the difference is the interest, and the rate is the repo rate.

Q4.Indian EconomyEasy

How many members does the Monetary Policy Committee of India have?

  1. A.Four
  2. B.Five
  3. C.Six
  4. D.Seven
Show answer
Correct answer: C. Six

Three of them come from the Reserve Bank, the Governor as chairperson, the Deputy Governor in charge of monetary policy and an officer of the Bank nominated by the Central Board, and three are appointed by the central government from among persons of ability and integrity with knowledge of economics…

Q5.Indian EconomyHard

The Monetary Policy Committee was given statutory basis by amending the Reserve Bank of India Act through which law?

  1. A.The Finance Act, 2016
  2. B.The Banking Regulation Act, 1949
  3. C.The Fiscal Responsibility and Budget Management Act, 2003
  4. D.The Foreign Exchange Management Act, 1999
Show answer
Correct answer: A. The Finance Act, 2016

It amended the Reserve Bank of India Act, 1934 to insert the provisions on the inflation target and on the Monetary Policy Committee, so that the policy rate is now set by a committee and not by the Governor alone, and the framework of flexible inflation targeting became law.