[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 10 March 2022 – Economy – INSIGHTSIAS

Solution: d)

Quantitative methods aim at controlling the cost and quantity of credit. It does not discriminate between different sectors and end use of credit.

Quantitative methods are:

• Discount Rate Policy
• Open market operations
• Variable Reserve Ratio
• Liquidity Adjustment Facility (LAF)
• Marginal Standing Facility.

Solution: a)

• Under the policy, financial institutions are required to pay interest for parking excess reserves with the central bank.
• This extraordinary monetary policy tool is used to strongly encourage borrowing, spending, and investment rather than hoarding cash, which will lose value to negative deposit rates.
• Officially set negative rates have been seen in practice following the 2008 financial crisis in several jurisdictions such as in parts of Europe and in Japan.

Solution: d)

The provisions of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) shall apply to all Scheduled Commercial Banks (SCBs) (including Regional Rural Banks), Small Finance Banks (SFBs), Payments Banks, Local Area Banks (LABs), Primary (Urban) Co-operative Banks (UCBs), State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs) unless stated to the contrary.

Solution: b)

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.

Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.

Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).

Solution: b)

Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate.

In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.