Advertisements
Advertisements
Question
As per the following news published in The Economic Times on 26th December, 2021:
‘Reserve Bank of India has sold government securities worth ₹ 8,710 crore in the secondary market, over the last four weeks, to drain out excessive liquidity’.
Identify the likely cause and the consequences behind, this type of action plan of the Reserve Bank.
Solution
The given instance where, Reserve Bank of India has sold government securities in the secondary market indicates towards inflation as a possible cause behind the action taken by RBI.
By selling off the government securities, RBI withdraws money from circulation and thereby reducing the lending capacity of the commercial banks. In this process, the economy will experience contraction of credit, leading to reduction in consumption and investment demand. Consequently, the inflationary pressure in the economy will get eased out.
APPEARS IN
RELATED QUESTIONS
What is money multiplier? What determines the value of this multiplier?
Define 'money multiplier'.
Read the following statements carefully and choose the correct alternatives given below:
Statement 1 - The value of the money multiplier is determined by the reserve ratio prevailing in the monetary system.
Statement 2 - The process of credit creation directly relates to the value of the reserve ratio.
Read the following text carefully, discuss briefly the relevant function of the Central Bank, indicated :
Recently, Reserve Bank of India (RBI) conducted a statutory inspection for supervisory evaluation against a Commercial Bank. The commercial bank was imposed with stringent penalties, owing to deficiencies in regulatory compliances.
As per the Central Bank, the inspection revealed non-compliances vis-a-vis different directions issued by RBI, on the following fronts:
- ATM Card frauds
- Ensuring integrity and quality of data
- Loans to small borrowers
‘Reserve Ratio and Credit Creation are inversely related.’ Do you agree with the given statement? Justify your answer with a suitable numerical example.
Find the missing figures and choose the correct alternative:
| Round | Deposits | Loans (80%) | Reserve Ratio (20%) |
| I | 1,000 | 800 | 200 |
| II | 800 | ….(i)…. | 160 |
| .. | .. | .. | |
| .. | .. | .. | |
| Total | …(ii)… | …(iii)… | …(iv)… |
