Q1. With reference to monetary policy and banking operations in India, consider the following statements:
- An increase in the repo rate can raise borrowing costs and moderate credit demand, although the extent of transmission depends on prevailing lending arrangements and market conditions.
- A rise in the credit-deposit ratio necessarily indicates an improvement in a bank’s liquidity position.
- Current Account Savings Account (CASA) deposits are generally important to banks because they provide a relatively low-cost source of funds.
- An increase in the market price of gold can raise the collateral value available to a borrower seeking a gold loan, even if the quantity of gold pledged remains unchanged.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 1, 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer: (b)
Explanation:
- Statement 1 is correct: A higher repo rate can increase funding and lending costs, potentially moderating borrowing and investment. The effect depends on monetary policy transmission.
- Statement 2 is incorrect: The credit-deposit ratio measures credit relative to deposits. A higher ratio may indicate greater deployment of deposits into loans, but does not necessarily imply better liquidity.
- Statement 3 is correct: CASA deposits are generally a relatively low-cost funding source, helping banks manage their cost of funds.
- Statement 4 is correct: If gold prices rise, the value of the pledged collateral may increase, potentially supporting a larger eligible loan, subject to lending rules and valuation practices.
