UPSC Prelims 2007 Q98: Indian Economy – Monetary Policy & Money Supply
Consider the following statements:
1. The repo rate is the rate at which other banks borrow from the Reserve Bank of India.
2. A value of 1 for the Gini Coefficient in a country implies that there is perfectly equal income for
everyone in its population.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a) 1 only
Explanation
Repo rate and Gini coefficient
| Statement | Fact | Verdict |
|---|---|---|
| 1. Repo rate = rate at which banks borrow from RBI | Banks borrow short-term from the RBI against government securities, under a repurchase agreement | TRUE |
| 2. Gini = 1 means perfectly equal income | Gini = 0 → perfect equality. Gini = 1 → perfect inequality (one person has all the income) | FALSE |
Related RBI rates:
| Rate | Direction |
|---|---|
| Repo | RBI lends to banks |
| Reverse repo / SDF | RBI absorbs money from banks |
| MSF | Emergency overnight borrowing by banks (repo + 0.25%) |
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. Repo is the rate at which banks borrow from the RBI; Gini = 1 means total inequality.
- (b) Incorrect. Statement 2 reverses the Gini scale.
- (c) Incorrect. Statement 2 is false.
- (d) Incorrect. Statement 1 is true.
Key point
Repo = RBI lends to banks. Gini 0 = perfect equality; Gini 1 = perfect inequality.
Remember
Gini coefficient 0 means perfect equality; 1 means perfect inequality.
Common mistakes
- Reversing the Gini scale — remember 0 = equal, 1 = unequal.
- Confusing repo (RBI lends) with reverse repo (RBI borrows).
- Thinking the Gini coefficient measures poverty — it measures inequality (from the Lorenz curve).
Exam tip
Gini: 'Zero = Zero difference.' Higher Gini → more unequal.
Sources
- RBI — Monetary Policy Framework
- NCERT Class XII — Introductory Macroeconomics, Ch 3
- World Bank — Gini Index methodology