money supply, banking & financial institutions section 1 MCQ Questions & Answers Detailed Explanation

Answer: (d)

When government deviates from the fiscal deficit target and spends more, it results in higher inflation. So even if RBI is trying to bring down the inflation, deviation in the fiscal deficit target will create issues in RBI achieving the inflation target.

To target inflation, RBI changes the repo rate which ultimately increases/decreases the interest rate, resulting in a change in the money supply. Through a change in money supply, RBI tries to achieve its inflation target. So, hindrances in monetary policy transmission may create issues in RBI achieving the inflation target.

In case of supply-side challenges like drought, floods or governance issues, just reducing the money supply may not result in bringing down the prices of commodities.

Answer: (d)

Monetary transmission is the pass-through of RBI’s monetary policy decisions to the economy at large in terms of interest rates, asset prices, or other economic parameters etc. And monetary transmission may result in any direction i.e. interest rates or asset prices moving up or down.

Answer: (b)

Section 227 of IBC 2016 says that "Notwithstanding anything to the contrary examined in this Code or any other law for the time being in force, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code.”

And the rules also say that to initiate resolution of FSPs under IBC 2016, the appropriate regulator should make an application. This is not applicable in other cases wherein the case of default, either the creditor or the debtor (company), anyone can move for resolution under IBC 2016.

Since section 227 got notified, the Ministry of Corporate Affairs (GoI) (using the powers under section 227) consulted the regulator (RBI) and said that those NBFCs with asset size of more than Rs. 500 crores can be brought under the IBC code for resolution.

This has been done only for those NBFCs which are regulated by RBI and not for those NBFCs which are regulated by other regulatory bodies like SEBI, IRDAI etc.

Answer: (d)

As a banker to the bank, RBI performs the following functions:

1. RBI enables banks to open their (current) accounts with RBI for maintenance of statutory reserve requirements (CRR and may be SLR)
2. RBI acts as a common banker for different banks to enable settlement of interbank transfer of funds
3. RBI provides short term loans and advances to banks for specific purposes
4. RBI acts as a lender of last resort may be in case of a bank run situation. (Bank Run is a situation that occurs when everybody wants to take money out of one’s bank account before the bank runs out of reserves.)

Answer: (a)

When there is a liquidity crisis with a bank, then RBI acts as "Lender of last resort" and provides loans at a particular interest rate to the bank.

But when there is major mismanagement in the bank and there are chances of major default/bankruptcy, then RBI, in consultation with Govt. of India, can supersede the "Board of Directors" of banks in the public interest. (But RBI may not supersede the Board of PSU banks).

Once RBI supersedes the Board of Directors (management), then it appoints an "Administrator". This is done as per the "Banking Regulation Act 1949" Section 36ACA.

So, (i) statement is false as RBI supersedes a bank's Board under "Banking Regulation Act 1949" and not under RBI Act 1934

In case of the Yes Bank Crisis, RBI superseded the management of Yes Bank and it also acted as lender of last resort and provided a 90-day loan AT BANK RATE of 5.4% (at that time Bank Rate was repo plus 0.25%, which comes out as 5.15% + 0.25% = 5.4%), plus 3% (so basically RBI charged 5.4% + 3% = 8.4% as a penalty) to meet the immediate liquidity needs of the Yes Bank.

Under the Lender of Last Resort, RBI gives loans against eligible securities to financial institutions (Banks and NBFCs both) in emergencies.

Answer: (a)

A self-Regulatory organization (SRO) is a nongovernmental organization that has the power to create and enforce industry regulations and standards.

The priority is to protect investors through the establishment of rules that promote ethics and equality.