Monetary Policy Framework And Instruments

* Lower Interest rates encourage additional investment spending , which gives the economy a boost in times of slow economic growth. * Changes in interest rates affect the public's demand for goods and services and, thus, aggregate investment spending. * A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending. * Lower interest rates also give banks more incentive to lend to businesses and households, allowing them to spend more.

Both the bank rate and open market operations are components of monetary policy in the Indian economy. **Bank rate:** The bank rate is the rate at which the central bank (Reserve Bank of India in the case of India) lends money to commercial banks. It is one of the key tools used by the central bank to control the money supply and credit conditions in the economy. **Open market operations:** Open market operations refer to the buying and selling of government securities (bonds) by the central bank in the open market. Through open market operations, the central bank can inject or withdraw liquidity from the banking system, thereby influencing the level of reserves held by banks and the overall money supply in the economy. **Public debt and public revenue** are not typically considered components of monetary policy. Public debt refers to the total amount of money owed by the government through borrowing, while public revenue refers to the income generated by the government through taxes and other sources. These factors are more closely related to fiscal policy, which involves government spending and taxation decisions to achieve specific economic objectives.

**Statement 1 is Correct:** The Monetary Policy Committee (MPC) does decide the RBI's benchmark interest rates. This is its primary function, and it influences the cost of borrowing and lending in the economy. **Statement 2 is Incorrect:** The MPC is a 6-member body, not 12. It includes the Governor of RBI and other members appointed by the government. The committee is not reconstituted every year, but members serve for specified terms. **Statement 3 is Incorrect:** The MPC functions under the chairmanship of the Governor of RBI, not the Union Finance Minister. Therefore, the correct answer is 1 only. Hence, option A is the correct answer.

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates. **Statement 1 is incorrect.** Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more. **Statement 2 is correct.** Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity. **Statement 3 is incorrect.** Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity. Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

* **Statement I- correct**: In the aftermath of the COVID-19 pandemic, many central banks around the world observed rising inflation. To combat this inflation, they resorted to raising interest rates. This is a well-established monetary policy tool to curb inflation by making borrowing more expensive and encouraging saving, thereby reducing the money supply in circulation. * **Statement II- correct**: Central banks are entrusted with maintaining price stability and managing inflation. Raising interest rates is one of the primary instruments they use to achieve this objective. While other factors can influence inflation, central banks do have the ability to significantly impact it through monetary policy measures. Therefore, both statements accurately reflect the role of central banks and their use of interest rates to manage inflation and statement 2 is the correct explanation for statement 1.

* Transactions without US Dollar or SWIFT : Traditional digital payments often rely on the US dollar as a reserve currency and might involve the SWIFT system for international settlements. * A central bank digital currency (CBDC) is the digital form of a country's fiat currency. CBDCs have the potential to bypass these traditional channels. Transactions between countries using their own CBDCs could happen directly, reducing reliance on the US dollar and potentially making cross-border payments faster and cheaper. * Programmable Money with CBDCs : CBDCs can be programmed with certain features. A central bank could issue a CBDC with a built-in spending time frame, for example, vouchers for specific purposes like public transport subsidies. These would expire after a certain period, ensuring the funds are used for the intended purpose. * Therefore, CBDCs offer unique functionalities compared to traditional digital currencies. They can potentially streamline international payments and introduce programmable features for targeted uses.

* **Statement 1 is correct**. The digital rupee, also known as the e-rupee or Central Bank Digital Currency (CBDC), is indeed a sovereign currency issued by the RBI. It's a digital representation of India's fiat currency and is part of the RBI's monetary policy toolkit. * **Statement 2 is correct**. Like physical currency, the digital rupee is a liability on the RBI's balance sheet. When you hold digital rupees, it's essentially a claim you have on the RBI, similar to holding physical banknotes. * **Statement 3 is incorrect**. The digital rupee, by itself, doesn't come with inherent inflation protection. Its value, like physical currency, is subject to inflationary pressures. The RBI manages inflation through its monetary policy measures, not through the inherent design of the digital rupee. * **Statement 4 is correct**. The digital rupee is designed to be freely convertible. This means you can easily exchange it with bank deposits (commercial bank money) and cash at a 1:1 ratio without any restrictions. **Therefore, the correct answer is (D) 1, 2 and 4.**