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Banking & Monetary Policy

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Home/Indian Economy/Banking & Monetary Policy/Page 13

Mains Answer Writing Latest Questions

Ayushi jain
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Ayushi jainBegginer
Asked: June 19, 2024In:
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What is sterilization, in your opinion? How does the RBI guard against outside shocks by stabilizing the money supply? (Answer in 200 words)

upsc: banking & monetary policy
  1. Blazero
    Blazero Begginer

    Sterilization refers to the process by which a central bank offsets the effects of foreign exchange interventions on the domestic money supply. When a central bank buys or sells foreign currency to influence exchange rates, it affects the amount of domestic currency in circulation. To neutralize thiRead more

    Sterilization refers to the process by which a central bank offsets the effects of foreign exchange interventions on the domestic money supply. When a central bank buys or sells foreign currency to influence exchange rates, it affects the amount of domestic currency in circulation. To neutralize this impact and maintain control over domestic monetary conditions, the central bank conducts sterilization operations.

    The Reserve Bank of India (RBI) uses sterilization to stabilize the money supply against external shocks. When there is an influx of foreign capital, leading to an increase in foreign exchange reserves, the RBI might sell government securities to absorb the excess liquidity. Conversely, if there is an outflow of foreign capital, causing a reduction in foreign exchange reserves, the RBI might buy government securities to inject liquidity into the system. This ensures that the money supply remains stable despite external capital flows.

    By managing the liquidity through open market operations (OMOs), the RBI can control inflation and interest rates, thereby stabilizing the economy. This is crucial for maintaining economic stability, as uncontrolled fluctuations in the money supply can lead to inflation or deflation, adversely impacting growth and financial stability.

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Aachal Vayeda
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Aachal VayedaBegginer
Asked: July 21, 2024In: ,
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impactindividualintellectual povertypoverty
  1. Sneha.s
    Sneha.s

    Intellectual poverty is the unwillingness to learn something, considering oneself to be fine. One remains in his own perceptions and thoughts, restraining the mind to grow. Economists believe that it will negatively affect both the concerned person and thereby the society. This hinders an individualRead more

    Intellectual poverty is the unwillingness to learn something, considering oneself to be fine. One remains in his own perceptions and thoughts, restraining the mind to grow. Economists believe that it will negatively affect both the concerned person and thereby the society. This hinders an individual to interpret and decipher the events taking place around him, especially in the economic and political spheres. This situation plays as an opportunity for those who rule. Consider an example of a nation where the citizens are not able to understand how the government and the nation works. Who will demand the necessities to live a quality life? Who will analyze and question the new laws and amendments passed? A situation can also arise when there are jobs but not desirable seekers. This in turn will generate unemployment and eventually derail the economy. Lack of right candidates and growing needs to cater the requirements of the nation will eventually trigger unending economic poverty in the longer run. It is a grave situation where the root cause is known and can be worked out. Nations can focus on intellectual growth and developing cognitive skills of its people to ensure prosperity.

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Anjali Varandani
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Anjali VarandaniBegginer
Asked: July 21, 2024In:
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  1. Yogita Gupta
    Yogita Gupta Begginer

    Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity. Interest Rates Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individualRead more

    Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity.

    Interest Rates

    • Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individuals and businesses. Meanwhile, savers, who are typically middle or lower-income, earn less on their savings.
    • Debt Burden: Lower rates can reduce debt burdens, freeing up income for consumption or investment, primarily benefiting those who already have debt.

    Asset Prices

    • Stock Market and Real Estate: Expansionary monetary policy, like lowering interest rates, often boosts asset prices such as stocks and real estate. Wealthier individuals, who are more likely to own these assets, experience greater increases in wealth.

    Economic Activity

    • Employment and Wages: Lower interest rates can stimulate economic activity, potentially leading to job creation and wage increases. However, the benefits might not be evenly distributed, often favouring higher-skilled workers more.

    Overall, while monetary policy can support economic growth, it can also exacerbate income and wealth inequality by disproportionately benefiting those with greater access to financial assets and credit.

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ritu sharma
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ritu sharmaBegginer
Asked: July 21, 2024In:
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question
  1. Neetika Walter
    Neetika Walter Begginer

    Monetary Policy is a macroeconomic policy decision taken by the central bank to manage interest rate and money supply with the aim to meet various macroeconomic goals. These set of actions are of two types: expansionary or contractionary. Decreasing money supply and increasing interest rates indicatRead more

    Monetary Policy is a macroeconomic policy decision taken by the central bank to manage interest rate and money supply with the aim to meet various macroeconomic goals. These set of actions are of two types: expansionary or contractionary. Decreasing money supply and increasing interest rates indicate a contractionary monetary policy. The opposite of this is an expansionary policy, which stimulates economic activity and accordingly affect employment and inflation. In India, the RBI uses a plethora of tools to implement the monetary policy. These include bank rate policy, credit control policy, open market operations, Statutory Liquidity Ratio, and Cash Reserve Ratio. The Main Liquidity Management Tool, Fine Tuning Operations, Marginal Standing Facility Rate, Liquidity Adjustment Facility, and Standing Deposit Facility Rate are other methods used by the central bank to achieve its macroeconomic goals. Each of these tools help the apex bank in bringing changes in the interest rate, or liquidity conditions in the market. For example, to spur economy, the RBI buys bonds through open market operations to boost liquidity and reduce interest rate. This is achieved through monetary policy. In India, the six-member Monetary Policy Committee, headed by the RBI Governor, meets once every quarter to decide on the policy.

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Ishan Bhardwaj
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Ishan BhardwajBegginer
Asked: July 12, 2024In:
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  1. Sourasis Chakraborty
    Sourasis Chakraborty Begginer

    In addition to traditional monetary and fiscal policies, several alternative economic tools can be employed to address deflationary pressures in a country: Infrastructure Spending: Government investment in infrastructure projects such as roads, bridges, and public buildings stimulates economic activRead more

    In addition to traditional monetary and fiscal policies, several alternative economic tools can be employed to address deflationary pressures in a country:

    1. Infrastructure Spending: Government investment in infrastructure projects such as roads, bridges, and public buildings stimulates economic activity, creates jobs, and boosts aggregate demand.
    2. Tax Incentives: Tax cuts or credits for businesses and consumers can encourage spending and investment, thereby stimulating economic growth and combating deflation.
    3. Quantitative Easing (QE): This involves central banks purchasing government securities or other financial assets to inject liquidity into the economy, lower interest rates, and encourage lending and spending.
    4. Targeted Subsidies: Providing subsidies to specific industries or sectors facing particular deflationary pressures can stabilize prices and prevent a downward spiral in economic activity.
    5. Currency Depreciation: A deliberate devaluation of the national currency can boost exports by making domestic goods cheaper for foreign buyers, thereby increasing demand and economic activity.
    6. Labor Market Reforms: Policies that encourage job creation, reduce unemployment, and enhance workforce skills can increase consumer spending and overall economic output.
    7. Price Level Targeting: Central banks can commit to maintaining a specific level of prices over the long term, which can anchor inflation expectations and prevent deflationary pressures from taking hold.
    8. Public Investment in Research and Development: Funding for innovation and technology development can spur long-term economic growth, creating new industries and increasing productivity.

    Each of these alternative tools can complement traditional monetary and fiscal policies, offering policymakers a diverse toolkit to combat deflation and stimulate economic recovery effectively.

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Anshika Singh
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Anshika SinghLearner
Asked: June 19, 2024In:
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What is the exchange rate that is flexible? Describe the causes of the Indian rupee’s growth and decline in relation to the US dollar. (Answer in 200 words)

upsc: banking & monetary policy
  1. Firdausi Khatun
    Firdausi Khatun Begginer
    This answer was edited.

    Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of theRead more

    Flexible exchange rate is also called as floating exchange rate which is a monetary policy. In this value of currency is determined by the foreign exchange market, this policy is in contrast with the fixed exchange rate in which value of currency is fixed by the government or the central bank of the country.
    The value of currency can fluctuate because of the market forces such as supply and demand forces in the market.

    Appreciation of the Indian rupee in relation to the US Dollar means the rupee has become stronger against the dollar. We can buy more dollars with rupees than before.
    Factors leading to appreciation are as follows:-
    1. Increase in the value of Indian Rupee related to the US dollar.
    2. Rupee becomes stronger against the dollar.
    3. Eg.The value of 1 US Dollar decreased from ₹75 to ₹70.It means now we can buy $1 with ₹70 for which we used to pay ₹75 before.

    Depreciation of the Indian rupee is the opposite of appreciation of rupee.In this the Rupee becomes weaker in relation to the US Dollar, we will get less dollars with rupees now.
    Factors leading to depreciation of the Indian rupee are as follows:-
    1. Decrease in the value of Indian Rupee related to the US Dollar.
    2. Rupee has become weaker against the dollar.
    3. Eg. The value of Doller has increased from ₹70 to ₹75. It means earlier we used to pay ₹70 to buy $1 but now we have to pay ₹75 for the same.

    The appreciation and depreciation can be caused by many different factors such as Trade balances, inflation rate, political instability, export-import, interest rates, foreign investment etc.
    Appreciation of rupees leads to increase in purchasing power of Indian consumers but negatively impacts export and import of the country whereas depreciation benefits the export-import.

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Kanhiya Lal
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Kanhiya LalBegginer
Asked: July 24, 2024In:
  • 1

Describe the several steps the RBI has taken to regulate credit in the economy.

upsc: banking & monetary policy
  1. Sangeeta rathor
    Sangeeta rathor Begginer

    Credit Control means the regulation of the creation and contraction of credit in the economy. It is an important function of the central bank of any country. In India, the Reserve Bank of India (RBI) controls credit in the economy using various quantitative and qualitative measures. Quantitative meaRead more

    Credit Control means the regulation of the creation and contraction of credit in the economy. It is an important function of the central bank of any country. In India, the Reserve Bank of India (RBI) controls credit in the economy using various quantitative and qualitative measures.

    Quantitative measures: These are deployed to regulate the volume of credit created by the banking system.

    • Bank rate Policy: It is the rate at which the RBI is ready to grant loans to commercial banks or rediscount the approved bills held by commercial banks. An increase in bank rate leads to an increase in other rates of interest and vice-e-versa. Thereby, changing the bank rate affects the cost and availability of credit.
    • Open market operations: It refers to the sale and purchase of securities by the RBI to the commercial banks. Sale/Purchase of securities by commercial banks from the RBI results in the increasing/decreasing of cash reserves with the banks.
    • Reserve Requirements: The RBI is empowered to change the reserve requirements of the commercial banks. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are two types of reserve ratio employed by RBI. A higher reserve requirement leaves less credit for banks to lend out.

    Qualitative measures: These are deployed to regulate the flow of credit in specific uses

    • Marginal requirements: It is the difference between the market value of the security and its maximum loan value. The RBI can increase or decrease the marginal requirement to affect the credit flow.
    • Consumer Credit Regulation: The RBI can control the consumer credit by changing the amount that can be borrowed for the purchase of the consumer durables or by changing the maximum period over which the installments can be extended.
    • Rationing of credit: In this, the RBI seeks to limit the maximum amount of loans and advances and, also in certain cases, fix ceilings for specific categories of loans and advances.
    • Moral Suasion: Here, the RBI tries to morally persuade the banks to cooperate in implementing its policies.
    • Direct Action: This step is taken by the RBI against banks that don’t fulfil conditions and requirements. It may involve refusal to rediscount their papers, charging a penal rate of interest over and above the Bank rate etc. It must be noted the effectiveness of credit control measures in an economy depends upon a number of factors and one or more of these measures are adopted by RBI based on the situation.
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surbhi bansal
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surbhi bansalBegginer
Asked: July 15, 2024In:
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why does repo rate change?

  1. Vaibhav Dhanorkar
    Vaibhav Dhanorkar Begginer

    The repo rate, set by a country's central bank, changes for several key reasons.   1. Controlling Inflation High Inflation: Central banks raise the repo rate to make borrowing more expensive. This reduces spending and investment, helping to lower inflation. Example: If inflation is high, increaRead more

    The repo rate, set by a country’s central bank, changes for several key reasons.

     

    1. Controlling Inflation

    High Inflation: Central banks raise the repo rate to make borrowing more expensive. This reduces spending and investment, helping to lower inflation.

    Example: If inflation is high, increasing the repo rate can slow down price rises by reducing consumer and business spending

    2. Stimulating Economic Growth

    Economic Slowdown: Central banks lower the repo rate to make borrowing cheaper. This encourages spending and investment, boosting economic activity.

    Example: During a recession, a lower repo rate can stimulate growth by making loans more affordable for businesses and consumers.

    3. Managing Liquidity

    High Liquidity: Raising the repo rate reduces excess money in the banking system, helping to control inflation.

    4. Currency Stability

    Strengthening Currency: Higher repo rates can attract foreign investment, increasing demand for the country’s currency and strengthening it.

    Example: If a currency is weakening, raising the repo rate can help attract foreign investors, stabilizing the currency.

    How the Repo Rate Changes

    Central Bank Meetings: Regular reviews of economic data and policy decisions.

    Economic Indicators: Analysis of inflation, growth, employment, and global conditions.

    Policy Decisions: Adjusting the repo rate based on economic needs.

    Summary

    Central banks change the repo rate to control inflation, stimulate growth, manage liquidity, and stabilize the currency. These adjustments help maintain economic stability and promote sustainable growth.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Tripti Jain
    Tripti Jain Begginer

    Managed Floating Managed floating is a type of exchange rate regime that combines elements of both fixed and floating exchange rates. In a managed float, the value of a country's currency is allowed to fluctuate in response to market forces, but the government or central bank intervenes in the foreiRead more

    Managed Floating

    Managed floating is a type of exchange rate regime that combines elements of both fixed and floating exchange rates. In a managed float, the value of a country’s currency is allowed to fluctuate in response to market forces, but the government or central bank intervenes in the foreign exchange market to influence the exchange rate and stabilize it within a desired range.

    Key Features:

    1. Floating exchange rate: The currency’s value is determined by supply and demand in the foreign exchange market.
    2. Government intervention: The government or central bank intervenes in the market by buying or selling its own currency to influence the exchange rate.
    3. Target range: The government sets a target range for the exchange rate and intervenes to keep it within that range.

    Goals:

    1. Stability: Managed floating aims to reduce exchange rate volatility and maintain stability.
    2. Competitiveness: It helps maintain a competitive exchange rate to support exports and economic growth.
    3. Inflation control: By influencing the exchange rate, the government can control inflation by managing the prices of imported goods.

    Example:

    The Chinese yuan (RMB) is an example of a managed float. The People’s Bank of China (PBOC) allows the yuan to fluctuate within a narrow range against the US dollar, while intervening in the market to maintain a stable exchange rate and support China’s economic growth.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth. 1. Repo and Reverse Repo Rates: The RBRead more

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth.

    1. Repo and Reverse Repo Rates: The RBI also changes the repurchasing rate at which banks can borrow from the RBI and the redeeming rate at which the RBI can borrow from the banks. Variation of these rates is employed by the RBI to control credit creation in the economy leading to impacted money availability in the economy.

    2. Cash Reserve Ratio (CRR): CRR is the proportion of the deposit, which banks are required to maintain with the RBI. CRR uplifting makes the credit available for lending to be scarce and therefore constrict money supply, while its trimming, has the reverse effect.

    3. Statutory Liquidity Ratio (SLR): Net demand and time liabilities are also specified as a minimum percentage to be reserved on approved securities. SLR change influences the banking liquidity and ability to approve loans.

    4. Open Market Operations (OMOs): To control the money supply, RBI also buys or offers government securities on the market. The sale of securities absorb funds from the market, on the other hand, purchase returns funds into the market.

    5. Market Stabilization Scheme (MSS): This tool was introduced to remove excess in the money supply; whereby its work is done through issuing government securities available for absorption of extra money.

    Collectively, these tools help make a certain that RBI runs a steady economy in relations to inflation, currency value and availably of credit.

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