Home/upsc: banking & monetary policy/Page 3
- Recent Questions
- Most Answered
- Answers
- No Answers
- Most Visited
- Most Voted
- Random
- Bump Question
- New Questions
- Sticky Questions
- Polls
- Followed Questions
- Favorite Questions
- Recent Questions With Time
- Most Answered With Time
- Answers With Time
- No Answers With Time
- Most Visited With Time
- Most Voted With Time
- Random With Time
- Bump Question With Time
- New Questions With Time
- Sticky Questions With Time
- Polls With Time
- Followed Questions With Time
- Favorite Questions With Time
What is Central Bank Digital Currency (CBDC)? Discuss the policy implications of introducing it in India.
A Central Bank Digital Currency (CBDC) is a new variant of central bank money different from physical cash or central bank reserve/settlement accounts. It is a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value. It can bRead more
A Central Bank Digital Currency (CBDC) is a new variant of central bank money different from physical cash or central bank reserve/settlement accounts. It is a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value. It can be issued under three models, Le. direct, indirect and hybrid.
Various implications of its issuance include:
As there are multiple compelling motivations for the introduction of CBDCs, the RBI is currently engaged in working towards a phased implementation strategy, going step by step through various stages of pilots followed by the final launch, and simultaneously examining use cases that could be implemented with minimal or no disruption.
See lessWhat is the flexible exchange rate? Explain the factors that lead to the appreciation and depreciation of the Indian rupee in terms of the dollar.
A flexible exchange rate is a monetary regime where the price of the currency of a nation relative to other currencies is determined by market forces based on supply and demand. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate. In aRead more
A flexible exchange rate is a monetary regime where the price of the currency of a nation relative to other
currencies is determined by market forces based on supply and demand. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate. In a completely flexible system, the Central Banks do not intervene in the foreign exchange market. Therefore, when the demand for foreign goods and services increases (for example, due to increased international travel by Indians), then the demand curve shifts upward and right to the original demand curve. This increase in demand for foreign goods and services results in a change in the exchange rate. Now, the new equilibrium gets created at “e1” which is higher than the earlier equilibrium “e”. It means that more rupees are to be paid for the foreign currency (dollar). In other words, with increased demand for foreign goods/services, the value of rupees in terms of foreign currency (dollar) has fallen and the value of foreign currency (dollar) in terms of rupees has risen. This situation is called ‘depreciation of domestic currency’ in terms of foreign currency (dollar). Similarly, in a flexible exchange rate regime, when the price of domestic currency in terms of foreign currency (dollar) increases, it is called ‘appreciation of the domestic currency’ (rupees) in terms of foreign currency (dollars). Factors influencing the appreciation and depreciation of the Indian rupee:
Other than these factors, political stability and economic growth are the two factors that attract more foreign investment, which in turn. help lower inflation and drive up the country’s currency exchange rate.
See lessWhile internationalization of rupee has many advantages, it is not devoid of risks. Discuss.
Internationalization of the rupee is a process that involves increasing use of the local currency in cross-border transactions. As far as the rupee is concerned, it is fully convertible in the current account, but partially in the capital account. There is a need to push the rupee much farther to geRead more
Internationalization of the rupee is a process that involves increasing use of the local currency in cross-border transactions. As far as the rupee is concerned, it is fully convertible in the current account, but partially in the capital account. There is a need to push the rupee much farther to get an international tag as it accounts for a mere 1.7% of global foreign exchange market turnover as compared to 88.3% of dollar, followed by the euro, Japanese Yen and Pound Sterling.
Advantages of Internationalisation of Rupee
However, internationalisation of rupee is not devoid of risks, highlighted as follows:
These risks are unavoidable if India progresses to be an economic superpower. We need to calibrate our moves to the evolving size of our economy as internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice.
See lessHighlighting the instruments of monetary policy available with RBI, discuss how it not only acts as a banker to the commercial banks but also to the government
Monetary policy refers to the policy of the central bank about the use of monetary instruments under its control. As the Central Bank, the RBI implements monetary policy through the following tools. A. Quantitative tools: Legal reserve ratio: Commercial banks are required to keep a certain amount ofRead more
Monetary policy refers to the policy of the central bank about the use of monetary instruments under its control. As the Central Bank, the RBI implements monetary policy through the following tools.
A. Quantitative tools:
B. Qualitative tools: These are also known as selective instruments of the RBI’s monetary policy.
- Rationing of credit: RBI limits the credit amount to be granted for particular sectors and commercial banks.
- Change in Marginal Requirement: Changing the margin requirement leads to a change in the loan size. This instrument is used to encourage the credit supply for the necessary sectors and avoid it for unnecessary sectors.
- Moral suasion: Moral suasion refers to the suggestions to commercial banks from the RBI that help in restraining credits in the inflationary period. RBI applies pressure on the Indian banking system without taking any strict action. Other than maintaining the money supply in the market through the above tools, RBI acts as a banker to the government as well as other commercial banks.
- Banker to commercial banks: The Reserve Bank is the only institution that can issue currency. When commercial banks need more funds to be able to create more credit, they may go to market for such funds or go to the Central Bank. The Central Bank provides the funds through various instruments such as Liquidity Adjustment Facility and Marginal Standing Facility.
- Banker to the government:
- Under the RBI Act, of 1934, RBI acts as the banker and debt manager to the Central Government as well as all state governments except Sikkim.
- It is entrusted with the management of remittance, exchange, and banking transactions in India including floating of loans and managing them, and providing Ways and Means Advances to the Governments. Thus, RBI plays a key role in managing and monitoring the monetary policies affecting commercial and personal finance, as well as the banking system.
See lessDiscuss the need and concerns associated with privatisation of public sector banks.
The government is planning to introduce key financial sector bills of the proposed law for facilitating the privatization of public sector banks. The government is seeking to reduce its holding in public sector banks as a part of its disinvestment drive. Need for privatization of public sector banksRead more
The government is planning to introduce key financial sector bills of the proposed law for facilitating the privatization of public sector banks. The government is seeking to reduce its holding in public sector banks as a part of its disinvestment drive.
Need for privatization of public sector banks (PSBs):
Concerns associated with the privatization of PSBs:
In this context, public sector banks can leverage tech-enabled and smart banking like loan management systems and centralized processing centers for reduced retail loan disbursement turnaround time. Further, adherence to risk-based pricing must be improved and bank boards need to be empowered to make autonomous decisions with minimal government interference. One-time settlement platforms and portals, eDRT (Debt Recovery Tribunals) need to be put in place for online recovery case management. Additionally, non-executive Chairmen need to be introduced in PSBs and Board Committee Systems need to be strengthened to improve governance in the banking sector in India.
See lessWhat do you understand by sterilization? How does RBI stabilize the money supply against external shocks?
Sterilization is a form of monetary action in which a central bank seeks to limit or neutralize the effect of inflows and outflows of capital on the money supply. For instance, if it takes Rs 70 to purchase 1 USD and the RBI wishes to keep the exchange rate from rising from its current level, it musRead more
Sterilization is a form of monetary action in which a central bank seeks to limit or neutralize the effect of inflows and outflows of capital on the money supply. For instance, if it takes Rs 70 to purchase 1 USD and the RBI wishes to keep the exchange rate from rising from its current level, it must sell dollars out of its foreign exchange reserves. Since the dollars will be purchased with rupees, the supply of rupees in circulation will decrease and the supply of dollars in circulation will increase, therefore, the value of the dollar will not rise relative to the rupees. But this action reduces the amount of domestic currency in circulation, which might not be desirable. For example, it may lead to a rise in interest rates. To counteract or sterilize this effect, the central bank may simultaneously purchase domestic (Indian) bonds to put domestic currency back in circulation. Similarly, if a central bank is buying foreign currency to keep the value of domestic currency low, it can sterilize such intervention by selling bonds and removing from circulation domestic currency that was introduced by such foreign exchange market intervention. In India, RBI has the following mechanisms to stabilize money supply against external shocks:
Other than these mechanisms, the absorption or injection of liquidity through the Liquidity Adjustment Facility (LAF) and Cash Reserve Ratio (CRR) also can sterilize liquidity. However, they are to be used in extreme cases, when other options are exhausted. Forex market intervention requires a continuous assessment of exchange market conditions, liquidity conditions, G-sec market conditions, and forward market conditions. The prudent sterilized interventions by RBI have not only ensured that the reserve money growth remains consistent with the requirements of the growing economy but also that money market rates remain aligned with the operating target of the monetary policy, no matter how significant and persistent the liquidity impact of forex interventions may be.
See lessWhat are Non-Performing Assets (NPAs)? Highlight the measures taken by the government to address the menace of NPAs in India in recent times.
A non-performing asset (NPA) refers to a classification for loans or advances of a bank that are in default or arrears. The period beyond the 'due date', past which the principal or interest payments are considered late or missed, has been accepted as '90 days' in India. For agricultural advances, iRead more
A non-performing asset (NPA) refers to a classification for loans or advances of a bank that are in default or arrears. The period beyond the ‘due date’, past which the principal or interest payments are considered late or missed, has been accepted as ’90 days’ in India. For agricultural advances, instead of 90 days overdue, cropping seasons are taken into consideration. Banks are required to classify non-performing assets further into the following three categories
As per RBI data, gross non-performing assets (GNPAs) of scheduled commercial banks in 2021 have doubled since 2014, but have declined from ₹9.5 trillion in FY19 to about 8 trillion as of 30.9.2021. To resolve the issue of NPA, the Indian government has introduced interventions in four major areas (4Rs):
1. Recognition of NPAs or hidden stress:
2. Recapitalization of Banks:
3. Resolution of insolvency:
4. Reform:
The broad-based nature of the solution to the NPA problem acts as a catalyst for the overall banking reforms. Increasing levels of NPAs can act as an appropriate anchor for monitoring and progressing towards the better overall health of the financial system.
See lessBringing out the various functions of money, mention its advantages over other types of assets.
Answer: Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Economically, each government has its money system. The following are the various functions of money: Medium of exchange: It means the money acts as an intermediaryRead more
Answer: Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Economically, each government has its money system. The following are the various functions of money:
Fungibility: A 20-rupee note can be easily exchanged for other denominations, say 10, 5, etc. However, an animal for exchange in the case of a barter system, on the other hand, cannot be considered fungible. The presence of money in the market is a determinant of the economic condition of a country and it is regulated by the concerned Central Bank.
See less