UPSC STATIC QUIZ – Economy : 3 May 2024

Solution: c)

As the Government of India presses ahead with its plan to internationalise the Indian Rupee (INR), an Inter-Departmental Group (IDG) of officials of the Reserve Bank of India (RBI) have in a report cautioned that internationalisation may result in increased volatility in the rupee’s exchange rate in the initial stages.

“This would further have monetary implications as the obligation of a country to supply its currency to meet the global demand may come in conflict with its domestic monetary policies, popularly known as the Triffin dilemma,” the IDG wrote.

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. 

Solution: a)

Statement 3 is incorrect.

The RBI can bank on the Contingency Fund in the case of any emergency requirement. 

The RBI normally pays the dividend from the surplus income it earns on investments and valuation changes on its dollar holdings and the fees it gets from printing currency, among others. The rupee depreciation against the dollar in recent months is also likely to weigh on the surplus transfer.

The Reserve Bank of India (RBI) has developed an Economic Capital Framework (ECF) for determining the allocation of funds to its capital reserves so that any risk contingency can be met and as well as to transfer the profit of the RBI to the government.

Solution: b)

Statement 2 is incorrect.

Monetary Base is also called as High powered money.

It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.

If a member of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note.

Similarly, the deposits are also refundable by RBI on demand from deposit-holders. These items are claims which the general public, government or banks have on RBI and hence are considered to be the liability of RBI.

Solution: b)

Statement 1 is incorrect.

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.

Solution: b)

Option 1 and 3 is correct.

Qualitative instruments are also known as selective instruments of the RBI’s monetary policy. These instruments are used for discriminating between various uses of credit; for example, they can be used for favouring export over import or essential over non-essential credit supply.

Following are some qualitative method of credit control used by the RBI:

• Rationing of Credit: RBI fixes a credit amount to be granted for commercial banks. For certain purposes, the upper credit limit can be fixed, and banks have to stick to that limit. This helps in lowering the bank’s credit exposure to unwanted sectors.
• Regulation of Consumer Credit: Here, features like instalment amount, down payment, loan duration, etc., are all fixed in advance, which helps to check the credit and inflation in the country.
• Change in Marginal Requirement: This instrument is used to encourage the credit supply for the necessary sectors and avoid it for the unnecessary sectors. That can be done by increasing the marginal of unnecessary sectors and reducing the marginal of other needy sectors.
• Moral Suasion: Moral suasion refers to the suggestions to commercial banks from the RBI that helps in restraining credits in the inflationary period. RBI implies pressure on the Indian banking system without taking any strict action for compliance with rules.