TNPSC Group 2 Economy — practice by topic

Answer: C. Collateralized Borrowing and Lending Obligation (CBLO) is a MONEY MARKET instrument. CBLO is a money-market product introduced by Clearing Corporation of India Ltd (CCIL) in 2003 for short-term funds. It allows borrowing and lending against eligible collateral (mainly G-Secs) with maturities ranging from one day to one year. Discontinued in 2018 and replaced by the Tri-party Repo (TREPS). CBLO/TREPS are short-tenor instruments serving banks, mutual funds, insurance companies and other institutions for liquidity management. The money market deals with such short-term debt instruments (typically less than one year), as opposed to bond market (long-term debt), forex (currency), or stock market (equities). Source: RBI Money Market documentation / CCIL website.

Answer: D. The RESERVE BANK OF INDIA is responsible for maintaining price stability by controlling inflation. The PRIMARY OBJECTIVE of RBI's monetary policy, as enshrined in the RBI Act 1934 (Section 45ZA, amended in 2016), is to MAINTAIN PRICE STABILITY while keeping in mind the objective of growth. The RBI Act sets a flexible inflation target of 4% (with a tolerance band of plus or minus 2%, i.e., 2-6%) measured by CPI inflation, jointly agreed with the Central Government every five years. The MONETARY POLICY COMMITTEE (MPC), constituted under the RBI Act, sets the policy repo rate to achieve this inflation target. MPC has 6 members (3 from RBI including the Governor, 3 external members nominated by the Government). Distractors: (A) Department of Consumer Affairs handles consumer protection laws. (B) Expenditure Management Commission (Bimal Jalan, 2014) made recommendations on expenditure but has no inflation-fighting role. (C) Financial Stability and Development Council (FSDC) coordinates regulators on financial stability, not inflation. Source: RBI Act 1934 (as amended 2016) / Monetary Policy Framework Agreement 2015.

Answer: C. The money multiplier increases with an INCREASE IN THE BANKING HABIT OF THE PEOPLE. THE MONEY MULTIPLIER (m) is the ratio of broad money supply (M3) to the monetary base (M0): m = M3/M0. It indicates how much commercial bank credit expansion can be sustained per unit of high-powered money. Standard money multiplier formula: m = (1 + c) / (c + r), where c = currency-to-deposit ratio and r = reserve-to-deposit ratio (CRR + SLR + excess reserves). For the multiplier to INCREASE, EITHER c (currency ratio) OR r (reserve ratio) must DECREASE. (C) CORRECT. AN INCREASE IN BANKING HABIT means more of the population's money is held in BANK DEPOSITS rather than as cash in hand. This REDUCES THE CURRENCY-DEPOSIT RATIO (c), which INCREASES the money multiplier. More money in the banking system means banks can lend more and create more deposit money through fractional reserve banking. This is the textbook answer. Why other options are WRONG: (A) Higher CRR — REQUIRES BANKS to hold more reserves with the RBI, REDUCING lendable funds, REDUCING the multiplier. Opposite direction. (B) Higher SLR — REQUIRES BANKS to hold more in liquid assets (government securities), REDUCING credit creation capacity, REDUCING the multiplier. Opposite direction. (D) Larger population — has no direct mechanical effect on the multiplier. Population growth might affect demand for money but does not by itself raise the multiplier. Source: syllabus Macroeconomics Chapter 'Money and Banking'.