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Question 1 of 5
1. Question
Depreciation in the rupee would negatively impact India in which of the following areas?
- Investments abroad
- Foreign Travel
- Foreign education
- NRI sending money back home
- Crude import
Select the correct answer code:
Correct
Solution: b)
Depreciation in the rupee impacts all expenditure in dollar terms— imports, foreign education, travel, investments abroad, medical treatment etc. On the other hand, if you are an exporter or an NRI sending money back home, depreciation would fetch you more rupees per dollar.
A depreciating rupee increases the cost of crude import, which accounts for almost 20% of India’s imports. A rise in cost of crude raises fuel prices and inflation. That, in turn, leads to a rise in interest rates, which increases our borrowing cost.
Incorrect
Solution: b)
Depreciation in the rupee impacts all expenditure in dollar terms— imports, foreign education, travel, investments abroad, medical treatment etc. On the other hand, if you are an exporter or an NRI sending money back home, depreciation would fetch you more rupees per dollar.
A depreciating rupee increases the cost of crude import, which accounts for almost 20% of India’s imports. A rise in cost of crude raises fuel prices and inflation. That, in turn, leads to a rise in interest rates, which increases our borrowing cost.
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Question 2 of 5
2. Question
Consider the following statements regarding Wholesale Price Index (WPI) and Consumer Price Index(CPI).
- WPI pertains to only goods, not services.
- WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator.
- WPI has a higher weight of manufactured goods and the CPI has a greater constitution of food items.
- RBI considers WPI as the main metric for the purpose of setting monetary policy.
Which of the above statements is/are correct?
Correct
Solution: a)
While the Consumer Price Index-based retail inflation — the more widely tracked policy tool — looks at the price at which the consumer buys goods, the WPI tracks prices at the wholesale, or factory gate/mandi levels. Between the wholesale price and the retail price, the difference essentially is the former only tracks basic prices devoid of transportation cost, taxes and the retail margin etc. And that WPI pertains to only goods, not services.
So, the WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year).
In recent years, the WPI and CPI have shown a degree of dissonance, given that the WPI has a higher weight of manufactured goods and the CPI has a greater constitution of food items.
WPI numbers are not the RBI’s main metric for the purpose of setting monetary policy.
Incorrect
Solution: a)
While the Consumer Price Index-based retail inflation — the more widely tracked policy tool — looks at the price at which the consumer buys goods, the WPI tracks prices at the wholesale, or factory gate/mandi levels. Between the wholesale price and the retail price, the difference essentially is the former only tracks basic prices devoid of transportation cost, taxes and the retail margin etc. And that WPI pertains to only goods, not services.
So, the WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year).
In recent years, the WPI and CPI have shown a degree of dissonance, given that the WPI has a higher weight of manufactured goods and the CPI has a greater constitution of food items.
WPI numbers are not the RBI’s main metric for the purpose of setting monetary policy.
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Question 3 of 5
3. Question
Consider the following statements regarding Currency chests.
- Currency chest is a place where Banks stock the money meant for ATMs.
- The security of currency chests is the responsibility of the bank in which they are situated.
- Currency chests are administrated by the RBI.
Which of the above statements is/are correct?
Correct
Solution: b)
Currency chest is a place where the Reserve Bank of India (RBI) stocks the money meant for banks and ATMs. These chests are usually situated on the premises of different banks but administrated by the RBI.
The money present in the currency chest belongs to the RBI and the money, kept in the strong room outside the currency chest belongs to the bank.
How is the loss recovered in case of a crime resulting in loss of cash?
As per the set guidelines, the bank, in which the currency chest is situated is liable to fulfill the loss of the currency chest.
The security of currency chests is the subject of the bank in which chests are situated. The Reserve Bank of India (RBI) reimburses the security expenses to the bank as per the set norms.
Incorrect
Solution: b)
Currency chest is a place where the Reserve Bank of India (RBI) stocks the money meant for banks and ATMs. These chests are usually situated on the premises of different banks but administrated by the RBI.
The money present in the currency chest belongs to the RBI and the money, kept in the strong room outside the currency chest belongs to the bank.
How is the loss recovered in case of a crime resulting in loss of cash?
As per the set guidelines, the bank, in which the currency chest is situated is liable to fulfill the loss of the currency chest.
The security of currency chests is the subject of the bank in which chests are situated. The Reserve Bank of India (RBI) reimburses the security expenses to the bank as per the set norms.
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Question 4 of 5
4. Question
Special Drawing Rights (SDR) can be used to
- Settle Balance of Payment transactions
- Supplementing IMF member countries’ official reserves.
- Bridge fiscal deficit and fund infrastructure projects
Select the correct answer code:
Correct
Solution: b)
The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies. It cannot be used to fund infrastructure projects as it is not a currency. Same goes for settling domestic financial bills of the government.
SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves.
IMF member countries can borrow SDRs from its reserves at favorable interest rates, mostly to adjust their balance of payments to favorable positions.
Incorrect
Solution: b)
The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies. It cannot be used to fund infrastructure projects as it is not a currency. Same goes for settling domestic financial bills of the government.
SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves.
IMF member countries can borrow SDRs from its reserves at favorable interest rates, mostly to adjust their balance of payments to favorable positions.
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Question 5 of 5
5. Question
Consider the following statements regarding Inflation Targeting
- Inflation targeting revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
- The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
Which of the above statements is/are incorrect?
Correct
Solution: d)
What Is Inflation Targeting?
Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
As a strategy, inflation targeting views the primary goal of the central bank as maintaining price stability.
Incorrect
Solution: d)
What Is Inflation Targeting?
Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
As a strategy, inflation targeting views the primary goal of the central bank as maintaining price stability.
