Context:
the Reserve Bank of India (RBI) has announced that it will conduct daily variable rate repo (VRR) auctions on all working days in Mumbai, until further notice. The daily auctions, aimed at easing the current liquidity tightness in the banking system.
The Variable Rate Repo (VRR)
The Variable Rate Repo (VRR) is that tool with the Reserve Bank of India (RBI) can fine-tune liquidity in the banking system. The VRR is a lending rate which might change as and when required to the economy.
- How does the VRR work?
- The RBI uses the VRR to reduce the amount of cash in the system.
- The RBI undertakes VRR operations to keep the system sufficiently liquid.
- The VRR impacts the rates of interest on loans that the banks charge.
- Why is the VRR significant?
- What is the Monetary Policy Committee (MPC)?
- A six-member committee heads the MPC under the RBI Governor.
- The MPC determines the repo rate in terms of the existing and changing macroeconomic scenario.
UPSC Civil Services Examination, Previous Year Questions (PYQs)
Prelims
Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do (2020)
- Cut and optimize the Statutory Liquidity Ratio
- Increase the Marginal Standing Facility Rate
- Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans: (b)
Q. With reference to Indian economy, consider the following: (2015)
- Bank rate
- Open market operations
- Public debt
- Public revenue
Which of the above is/are component/ components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
Ans: (c)
Mains
Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)
