RAS question
The Reserve Bank of India (RBI) uses which of the following as the primary tool for monetary policy?
Correct answer: (A) Repo Rate.
The Reserve Bank of India uses the policy repo rate as the primary instrument of monetary policy.
Explanation
The repo rate is the rate at which the RBI lends money to commercial banks, and it is treated as the main policy signal in India’s monetary framework. The cited RBI Governor’s Statement states directly that the primary instrument of monetary policy is the policy repo rate. It also explains the logic of transmission: changes in short-term interest rates are expected to pass through to various long-term rates. That is why a repo-rate change matters beyond the immediate RBI-bank transaction; it influences the wider interest-rate structure in the economy. In contrast, liquidity tools such as open market operations are described by the RBI as serving liquidity management, not as the primary policy instrument.
Why the other options are wrong
- (B) The Statutory Liquidity Ratio is a banking liquidity requirement, whereas the cited RBI statement identifies the policy repo rate as the primary monetary-policy instrument.
- (C) The Bank Rate is adjusted alongside other rates in the RBI’s corridor, but the source names the policy repo rate, not the Bank Rate, as the primary instrument.
- (D) The Cash Reserve Ratio affects bank reserves, but the question asks for the primary monetary-policy tool, which the RBI source states is the policy repo rate.
Concept
This tests the monetary-policy instruments part of the Indian Economy syllabus. It recurs in RAS because repo-rate changes link RBI decisions with borrowing costs, liquidity conditions and policy transmission.