Hi Readers.
Here we are providing some Important Question – Answers which will definitely help you while preparing for Interview.
Q. What do you understand by monetary policy?
OR
How monetary policy differs from Fiscal policy ?
Ans: Monetary Policy
1. Monetary policy is the process by which the monetary authority of a currency controls the supply of money.
2. It often targets an inflation rate or interest rate to ensure price stability and general trust in the currency.
3. It also contributes to economic growth and stability, to low unemployment, and to predictable exchange rates with other currencies.
4. It is released by central bank of the country(RBI in context of India).
Fiscal Policy
1. It refers to taxation, government spending, and associated borrowing.
2. It is the use of government revenue collection (mainly taxes) and expenditure(spending) to influence the economy.
3. It is administered by GOI(finance ministry).
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Q. what is expansionary Monetary Policy?
A. an expansionary Monetary policy increases the total supply of money in the economy more rapidly than usual.
It is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.
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Q. What is contractionary Monetary Policy?
Ans: Contractionary policy expands the money supply more slowly than usual or even shrinks it.
Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.
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Q: what are the latest Changes RBI has done on Interest rates(15th jan 2015)?
Ans:
1. Reserve Bank of India has cut repo rate by 25 basis points.
2. This will have a positive impact on the Indian economy as banks will lower their lending rates. You car and home loans are set to become cheaper.
3. Benefits/outcomes of Reduction in Repo rate”
(a) Cheaper loans:
Since RBI cut the Repo rate with 25 basis points from 8% to 7.75% with the immediate effect, the banks are expected to follow suit and cut lending rates.
Eg: United Bank of India has already announced a similar 25 basis points drop in its base rate. The base interest rate of the Bank now stands at 10%.
With more banks expected to follow with their lending rate cuts, your loans, -like home- and auto-loans will get cheaper.
(b) For corporate sector:
Corporate loans, too, are set to get cheaper and hence the expected disbursement of those will increase.
The industry has been demanding a rate cut by the RBI to boost investment and demandgrowth.
With this surprise rate cut, banks and non-banking financial companies will have more cash to lend as the repo rate cut will infuse much needed liquidity in the market.
Moreover, as the Narendra Modi government withdrew excise duty benefit from the autosector forcing car and two-wheeler makers to increases prices by 1-5%, this rate cut will help bolster sales as consumer loans are set to get cheaper.
The World Bank has already indicated that it expects India’s GDP to grow at 6.4% in 2015 and likely to catch up with China in 2016 and 2017.
With wholesale inflation at 0.11% in December and retail inflation at 5%, the RBI has the room to give more cheer to the market in the coming days.
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Q: Why did RBI cut repo rate by 25 basis points to 7.75% of a sudden ?
Ans:
Here are the three main reasons why the RBI cut repo rate:
(1) Dip in inflation
India’s wholesale price index for December rose just 0.11 per cent year-on-year, after staying flat in November, according to data released on Wednesday.
Retail inflation, meanwhile, rose to 5 per cent in December – below the 5.4 per cent annual rise predicted by analysts in a Reuters poll. The RBI is targeting retail inflation of 6.0 per cent by January next year.
(2) Fall in oil prices
Global oil prices breached the six-year low of $45 a barrel briefly on Tuesday but the last word is yet to be heard on how far crude would slide before bouncing back. The low oil prices have kept the good times rolling for emerging economies such as India.
For India, the takeaway has been sharp reduction in pump prices of petrol and diesel. Petrol prices are now Rs 12.27 per litre lower than in August, while diesel prices are down Rs 8.46 a litre since October.
Low oil prices would reduce inflation and the oil import bill, which was $160 billion last year and is likely to be around $100-110 billion this year. It would also bring down subsidy on kerosene and cooking gas.
(3) Govt’s commitment to contain fiscal deficit
The continuous fall in oil prices would go a long way in keeping the government deficit in check.
The RBI cited the government’s commitment to sticking to a fiscal deficit target as a key reason for its Thursday’s surprise rate cut.