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Q1Indian Economy·Monetary Policy & BankingPYQ 2025
Which of the following are sources of income for the Reserve Bank of India?
1. Buying and selling government securities
2. Buying and selling foreign currency
3. Printing and distributing currency notes
Select the correct answer using the code given below:
- A1 and 2 onlyCorrect
- B2 and 3 only
- C1 and 3 only
- D1, 2 and 3
Explanation
This is incomplete because the RBI also earns through foreign exchange operations in addition to government securities transactions.
Why the other options are incorrect
- Option B
Printing and distributing currency is a sovereign function and not treated as a regular source of income in the sense asked here.
- Option C
Foreign exchange operations are also an important source of RBI income, so this option is incomplete.
- Option D
This is incorrect because printing and distributing currency is not counted here as an income source of the RBI.
Q2Indian Economy·Monetary Policy & BankingPYQ 2023
Which activity of the Reserve Bank of India is considered part of 'sterilization'?
- AConducting Open Market OperationsCorrect
- BOversight of settlement and payment systems
- CDebt and cash management for Central and State Governments
- DRegulating non-banking financial institutions
Explanation
Correct. Sterilization involves OMOs to offset the domestic liquidity impact of RBI foreign exchange intervention.
Why the other options are incorrect
- Option B
Payment system oversight is a regulatory function unrelated to sterilization of forex inflows.
- Option C
Debt and cash management is a fiscal agency function, not sterilization.
- Option D
NBFC regulation is a supervisory function, not monetary sterilization.
Q3Indian Economy·Monetary Policy & BankingPYQ 2023
In the post-pandemic period, many central banks carried out interest rate hikes. Which of the following best explains this?
Statement I: Central banks raised interest rates to combat rising consumer prices.
Statement II: Central banks generally assume they can counteract rising consumer prices via monetary policy.
Select the correct answer:
- ABoth Statement I and Statement II are correct and Statement II is the correct explanation of Statement ICorrect
- BBoth Statement I and Statement II are correct but Statement II is not the correct explanation of Statement I
- CStatement I is correct but Statement II is incorrect
- DStatement I is incorrect but Statement II is correct
Explanation
Correct. Central banks raised rates to contain inflation, and they did so because monetary theory holds that tightening monetary conditions can dampen consumer price increases.
Why the other options are incorrect
- Option B
Statement II does in fact explain why central banks chose interest rate hikes, so this option is incorrect.
- Option C
Statement II reflects the standard monetary policy transmission assumption and is correct.
- Option D
Statement I is factually correct; post-pandemic rate hikes were widely documented.
Q4Indian Economy·Monetary Policy & BankingPYQ 2023
Consider the following statements about the Digital Rupee (e-Rupee) issued by the RBI:
1. It is a sovereign currency aligned with the monetary policy objectives of the RBI.
2. It appears as a liability on the RBI's balance sheet.
3. It is insured against inflation by design.
4. It is freely convertible against commercial bank money and cash.
How many of the above statements are correct?
- AOnly one
- BOnly two
- COnly threeCorrect
- DAll four
Explanation
Correct. Statements 1, 2 and 4 are correct. The Digital Rupee is sovereign currency, appears as RBI liability, and is freely convertible. However, it is not inherently insured against inflation.
Why the other options are incorrect
- Option A
More than one statement is correct; statements 1, 2 and 4 are all valid.
- Option B
Three statements are correct, not two.
- Option D
Statement 3 is incorrect because no currency, including CBDC, is inherently insured against inflation.
Q5Indian Economy·Monetary Policy & BankingPYQ 2023
Consider the following statements about CBDC (Central Bank Digital Currency):
1. It is possible to make payments in a digital currency without using the US dollar or the SWIFT system.
2. A digital currency can be distributed with a programmed condition of usage such as a time frame for spending.
Which of the statements given above is/are correct?
- A1 only
- B2 only
- CBoth 1 and 2Correct
- DNeither 1 nor 2
Explanation
Correct. CBDCs can bypass SWIFT and dollar dependence, and they can incorporate programmable features such as spending time frames.
Why the other options are incorrect
- Option A
Statement 2 is also correct because CBDCs can be programmed with conditions like expiry dates.
- Option B
Statement 1 is also correct as CBDCs allow direct bilateral settlement outside traditional dollar-based and SWIFT channels.
- Option D
Both statements accurately describe known characteristics of CBDCs.
Q6Indian Economy·Monetary Policy & BankingPYQ 2022
If inflation is rising and the rupee is under depreciation pressure, which one of the following combinations is most likely to be consistent with monetary tightening by the RBI?
- ALower policy rates and lower reserve requirements
- BHigher policy rates and tighter liquidity conditionsCorrect
- CHigher policy rates and larger monetization of deficit
- DHigher fiscal deficit and lower repo rate
Explanation
Correct. Monetary tightening typically involves higher policy rates and tighter liquidity to contain inflation and support the currency.
Why the other options are incorrect
- Option A
This is an expansionary combination that can intensify inflationary and exchange-rate pressures.
- Option C
Monetization of deficit works against monetary tightening and can be inflationary.
- Option D
A lower repo rate would contradict the tightening response described in the question.
Q7Indian Economy·Monetary Policy & BankingPYQ 2022
In India, the institution primarily responsible for maintaining price stability while keeping in mind the objective of growth is the:
- AFinance Commission
- BSecurities and Exchange Board of India
- CNITI Aayog
- DReserve Bank of IndiaCorrect
Explanation
Correct. The RBI is India's monetary authority and is tasked with price stability while supporting growth.
Why the other options are incorrect
- Option A
The Finance Commission deals with fiscal devolution, not day-to-day price stability management.
- Option B
SEBI regulates securities markets and does not conduct monetary policy for inflation control.
- Option C
NITI Aayog is a policy think tank and not the monetary authority.
Q8Indian Economy·Monetary Policy & BankingPYQ 2022
Tight monetary policy by the U.S. Federal Reserve is likely to have which of the following effects on India?
1. Capital outflows from emerging markets may rise.
2. External commercial borrowing may become costlier.
3. Pressure on the domestic currency may increase.
Select the correct answer using the code given below:
- A1 and 2 only
- B2 and 3 only
- C1 and 3 only
- D1, 2 and 3Correct
Explanation
Correct. Higher U.S. rates can trigger capital reallocation, raise external borrowing costs and weaken emerging-market currencies.
Why the other options are incorrect
- Option A
Capital outflows and higher borrowing costs are possible, but pressure on the rupee can also rise, so this is incomplete.
- Option B
This misses the first channel: investors may move funds toward higher U.S. yields, increasing capital outflows.
- Option C
This excludes the effect on external borrowing costs, which can also rise under tighter global financial conditions.
Q9Indian Economy·Monetary Policy & BankingPYQ 2022
Consider the following RBI actions:
1. If inflation is too high, RBI is likely to buy government securities in open market.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the forex market.
3. If interest rates in the USA or Europe fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct?
- A1 and 2 only
- B2 and 3 onlyCorrect
- C1 and 3 only
- D1, 2 and 3
Explanation
Correct. To arrest rapid depreciation, RBI sells dollars. When foreign rates fall, capital may flow into India, prompting RBI to buy dollars to prevent excessive appreciation.
Why the other options are incorrect
- Option A
Statement 1 is incorrect because buying government securities injects liquidity, which is counterproductive when inflation is high.
- Option C
Statement 1 is incorrect; to fight inflation, RBI would sell, not buy, government securities.
- Option D
Statement 1 is wrong because buying securities adds liquidity, worsening inflation.
Q10Indian Economy·Monetary Policy & BankingPYQ 2022
Which one of the following best describes the difference between NEER and REER?
- ANEER is adjusted for inflation, while REER is not
- BREER is a trade-weighted exchange rate adjusted for relative inflation, while NEER is not inflation-adjustedCorrect
- CNEER measures only current account transactions, while REER measures capital account transactions
- DThere is no difference between the two
Explanation
Correct. NEER is a nominal effective exchange rate, while REER adjusts NEER for inflation differentials with trading partners.
Why the other options are incorrect
- Option A
This reverses the correct relationship. REER is the inflation-adjusted measure, not NEER.
- Option C
These indices are exchange rate indicators, not separate measures of current and capital account flows.
- Option D
The two are distinct and widely used for different analytical purposes.
Q11Indian Economy·Monetary Policy & BankingPYQ 2021
Which one of the following is most likely to increase the money multiplier in an economy?
- AAn increase in the Cash Reserve Ratio
- BAn increase in the Statutory Liquidity Ratio
- CAn increase in banking habits of the peopleCorrect
- DA sharp rise in import duties
Explanation
Correct. Greater banking habits raise the deposit base relative to cash holdings and support a larger money multiplier.
Why the other options are incorrect
- Option A
A higher CRR restricts banks' lendable resources and tends to reduce the money multiplier.
- Option B
A higher SLR also reduces the fraction of deposits available for credit creation.
- Option D
Import duties influence trade costs, not directly the deposit-creation process underlying the money multiplier.
Q12Indian Economy·Monetary Policy & BankingPYQ 2021
Among the following, the most inflationary method of financing a budget deficit is:
- AExternal commercial borrowing
- BHigher tax collection
- CDisinvestment
- DCreation of new moneyCorrect
Explanation
Correct. Monetizing the deficit by creating new money directly expands liquidity and can fuel inflation.
Why the other options are incorrect
- Option A
Borrowing may create future debt burdens, but direct money creation is generally more immediately inflationary.
- Option B
Higher tax collection does not expand money supply in the same inflationary manner.
- Option C
Disinvestment changes asset composition and raises receipts; it is not the most inflationary mode.