Previous Year Question
With reference to the Indian economy, consider the following:
Bank rate
Open market operations
Public debt
Public revenue
Which of the above is/are component(s) of Monetary Policy?
Only 1
2, 3 and 4
1 and 2
1, 3 and 4
Correct Answer: C
Detailed Solution
Monetary policy is used by the Reserve Bank of India to influence money supply, liquidity, interest rates and credit conditions in the economy.
Statement 1 is correct: Bank Rate is the standard rate at which RBI is prepared to buy or rediscount eligible bills of exchange or other commercial paper under the Reserve Bank of India Act. It is a monetary-policy-related rate and is also used for certain penal and regulatory purposes.
Statement 2 is correct: Open Market Operations involve the purchase or sale of government securities by RBI.
Purchase of government securities by RBI injects durable liquidity into the banking system.
Sale of government securities absorbs excess liquidity from the banking system.
Thus, OMO is an important instrument of monetary policy and liquidity management.
Statement 3 is incorrect: Public debt represents the internal and external borrowings of the government. It is primarily associated with fiscal policy and public debt management. Government securities may be used in OMO, but public debt itself is not a component of monetary policy.
Statement 4 is incorrect: Public revenue consists of the government’s tax and non-tax receipts. It forms part of government budgeting and fiscal policy, not monetary policy.
Therefore, only Bank Rate and Open Market Operations are components of monetary policy.