Reserve Bank of India
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Central Banking (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
Why is the RBI described as the 'lender of last resort'?
The RBI provides emergency liquidity to solvent but temporarily illiquid banks when no other source of funding is available, preventing bank runs from becoming systemic crises.
What does the Preamble of the RBI Act, 1934 state as the primary mandate of the Reserve Bank of India?
To regulate bank note issue and secure monetary stability in India.
What is the Bagehot principle that underpins the RBI's lender-of-last-resort function?
The Bagehot principle states that the central bank should lend freely against good collateral at penalty (above-market) rates to illiquid but solvent banks during a crisis.
From which date did RBI withdraw from participating in the primary market of Government securities auctions?
April 1, 2006, under FRBM Act, 2003 provisions.
Why does the RBI lend at penalty rates rather than below-market rates when acting as lender of last resort?
Penalty rates discourage banks from over-relying on RBI emergency liquidity, reducing moral hazard while still providing necessary crisis support.
Why did RBI's withdrawal from primary Government securities auctions reduce fiscal dominance over monetary policy?
It broke the automatic monetization link, preventing deficit-driven inflation.
Why does the RBI's lender-of-last-resort role require that the borrowing bank be solvent?
Lending to insolvent banks would increase moral hazard; solvency is a precondition so that emergency support does not reward reckless risk-taking.
What was the key difference between ad hoc Treasury Bills and the Ways and Means Advances system?
Ad hoc TBs had unlimited monetization; WMA has defined limits for temporary mismatches.
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