The Institute of Banking Personnel Selection (IBPS) will conduct the Personal interviews for IBPS Probationary Officer’s selection for participating banks, often called as IBPS PO (CWE-VI PO/MT). Here is a list of the most expected questions from the Economics and Banking Awareness section with their answers to help you clear the IBPS PO interviews 2017, which are going to be conducted from February, 2017.
- What is monetary policy?
Who controls India’s monetary policy? The RBI determines India’s monetary policy. It is a method by which the central bank maintains sufficient money supply in the economy by controlling interest rates and other instruments in order to ensure price stability and high economic growth.
- What are Open Market Operations?
Open Market Operations refer to the purchase or sale of government securities in the open market by the RBI.
When the RBI sells securities in the market, money gets transferred from commercial banks to the RBI. This decreases money supply in the system. Shortage of money in the economy helps to control spending by individuals/corporates and keep inflation in check.
When the RBI purchases securities from the market, money gets transferred from RBI to the commercial banks, thereby increasing the money supply. This is done if economic growth is sluggish.
- What is Repo rate?
Repo rate is the rate at which the RBI lends money to commercial banks in case of any shortage of funds.
It is the rate of interest charged on short-term (3-90 days) loans.
It is used by monetary authorities to control inflation.
- What happens when the RBI increases or reduces the Repo rate?
When the repo rate increases, borrowing from the RBI becomes more expensive. In other words, the RBI would charge a higher rate of interest for money provided to various commercial banks. The banks would thus be forced to charge their customers a higher rate of interest on home and auto loans in order to balance the impact of the rate hike. Thus, while on the one hand, inflation is under control as there is less money to spend, growth suffers as companies avoid taking loans at high rates. This leads to a drop in production and expansion. When the repo rate is reduced banks get money from the RBI at a cheaper rate of interest. Banks thus charge their customers a low rate of interest on home, auto and other types of loans.
- What is Bank rate?
It is the rate of interest implemented by the RBI when it lends money to a public sector bank on a long-term basis, i.e. from a period ranging from 90 days to 1 year. By this definition, bank rate and repo rate seem to be similar terms as both are interest rates at which RBI lends money to banks.
- What is Marginal Standing Facility (MSF)?
It is the rate at which banks borrow funds overnight from the RBI against approved government securities. MSF was implemented in May 2011. Under MSF, banks can avail funds from the RBI on overnight basis against their excess statutory liquidity ratio (SLR) holdings.
- What is Cash Reserve Ratio (CRR)?
It is the reserve of funds that banks have to mandatorily keep with the RBI, and is a percentage of the deposits held by the bank. The RBI uses CRR to remove excessive money from the system. If the central bank decides to increase the CRR, the amount available with the banks reduces.
Example: If a bank account holder deposits Rs. 1,000 in his account, the bank can use it to lend money to others, but has to deposit a percentage of that amount with the RBI. If the CRR is 4%, the bank will deposit Rs.40 with RBI and will have Rs.960 left at its disposal.
- What is Statutory Liquidity Ratio (SLR)?
It is the amount a commercial bank needs to maintain in the form of cash, gold, or government-approved securities (bonds) before lending credit to its customers. SLR is determined by the RBI in order to control the expansion of bank credit.
- How is SLR determined?
SLR is calculated as the percentage of total demand and time liabilities, which a commercial bank is liable to pay to customers on their demand.
- Why is SLR needed?
With SLR, the RBI can ensure solvency (creditworthiness) of a commercial bank. It also helps to control expansion of bank credits. By altering SLR rates, the RBI can increase or decrease bank credit expansion.
- What is liquidity adjustment facility (LAF)?
LAF is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF aids banks to address liquidity pressures i.e. cash shortages and is used by the government to ensure stability in financial markets. LAF comprises repo and reverse repo transactions.