RBI Grade B

Welcome to RBI Grade B. We will study Programme Reader 02 — Core Concepts & Vocabulary, work through an example, and practise using the course's learning material. RBI Grade B exam preparation programme. Sign in and use the study header to open your authorised course. Select this published lesson. Start Course Tutor with Auto audio on: it teaches continuously, answers a typed question, then resumes. Start with monetary vocabulary, because almost everything else in the second phase leans on it. The policy repo rate is the rate at which the central bank lends to banks against eligible securities for short periods, and it is the principal instrument of policy. Here is a textbook illustration of how a reserve requirement works. The figure used is hypothetical, chosen for arithmetic convenience, and is not a statement of any actual ratio. Suppose banks were required to hold ten per cent of deposits as reserves and held no excess. In the simple deposit creation model, an initial injection of one thousand units of reserves supports deposits of one thousand divided by zero point one, which is ten thousand units. The multiplier is the reciprocal of the reserve ratio, so it is ten. Now suppose the requirement were raised to twenty per cent. The multiplier becomes the reciprocal of zero point two, which is five, and the same one thousand units of reserves now support only five thousand units of deposits. Raising the ratio has halved the deposit creation capacity of the system. The point is the direction and the reason, not the arithmetic. A higher reserve requirement drains lendable resources and tightens conditions; a lower one does the opposite. This examination asks you to explain that mechanism and its limits, notably that the simple multiplier overstates matters because banks hold excess reserves and the public holds currency. Which mistake would change the reasoning in this example? The first mistake is learning instrument values instead of instrument functions. Values change; functions do not. The second is confusing the cash reserve ratio with the statutory liquidity ratio. Ask Course Tutor: please explain this step from the example. The multiplier is the reciprocal of the reserve ratio, so it is ten. Why does it follow? Add what you tried, so the explanation addresses your difficulty. Now try the source practice. What does the policy repo rate do? Pause before the answer. The source answer is: It is the rate at which the central bank lends to banks for short periods against eligible securities, and it is the principal policy instrument. Explain the key idea in your own words, revisit any mistaken step, then continue to the next lesson. Use Stop to end Course Tutor when you finish.