It has been observed in the recent banking examinations that questions on Reading Comprehension come from passages taken from newspapers such as The Times of India, The Economic Times, The Business Line, The Business Standard etc. Here, is a quiz from an article taken from the ‘The Business Line’.
Question (1-10): Read the following passage carefully and answer the questions that follow. Some words / phrases are printed in bold in the passage in order to help you trace them while answering some of the questions.
Does ‘curve control’ bring to your mind weight-loss clinics and slimming diets? Perish the thought. It is a central bank which has recently introduced the term ‘yield curve control’ to the world. Globally, central banks are vying with each other to invent new tools to revive their moribund economies. The latest one to do the rounds is ‘yield curve control’ unveiled by the Bank of Japan (BoJ) last week.
Put simply, yield curve control is a the Bank of Japan’s attempt to keep a tight leash not only on short-term rates but also on long-term interest rates in the economy. The Bank has promised to ‘control’ the market to make sure that the yield on the country’s 10-year government bond remains at zero per cent. To achieve this feat, it will do the right amount of bond purchases. Confused? Let us go back to basics. Central banks normally revive the activity in the economy by cutting interest rates or pumping money into the economy. When a central bank wants to infuse money into the market, it buys assets, usually government bonds, and releases cash in exchange. But when a central bank buys bonds, it also reduces bonds in the market, thus moving bond prices up. When bond prices rise, as we know, yields on the bonds move lower. Now, the BoJ wants to ensure that that yields on the 10-year government bonds hover at zero per cent.
Central banks usually target short-term interest rates in the economy through their monetary policy. In Japan, the short-term policy rate is minus 0.1 per cent. What this means is that banks in Japan will have to pay the central bank 0.1 per cent on the excess reserves they maintain with it. The intent is that banks should maximize lending. But the BoJ now believes that controlling short-term rates alone isn’t enough. It hopes to keep tabs on long-term rates through its yield curve control. With short-term rates at -0.1 per cent and the 10-year at zero, it will ensure a steeper yield curve. This is good news for banks as they can now borrow money at cheaper short-term rates and lend at higher longer-term rates to pocket some margins.
There is yet another not-so-obvious reason for the BoJ’s move too. Currently, the yields on 10-year Japanese bonds are below zero — a negative 0.05 per cent. But yield curve control is an implicit ‘go ahead’ to the government to undertake fiscal stimulus to revive the ailing economy if need be. If the government ups spending and borrows to fund this, the supply of bonds will shoot up, prices may tumble and yields may shoot up. BoJ is saying that it will intervene in the market to ensure that the cost of borrowing for the government stays at zero.
Central banks desperately trying every trick in the book to revive their economies can hardly be a comforting thought. An anemic level of economic growth, such as the one seen in Japan and Europe, has growth implications for the rest of the world — even India. Also, aggressive monetary easing has been fuelling foreign investor flows to emerging markets like India. This can create asset bubbles and leave us more vulnerable to external shocks in future. Further, how BoJ chooses to tweak its bond rates can thus influence rates in our economy as well.
1. Which among the following is an objective of ‘Yield Curve Control’ described in the passage?
a) This is aimed at increasing the rates of interest in the long term whereas there is no effect on short term interest rates
b) This is aimed at controlling the short term as well as long term interest rates in an economy
c) This is a bond purchase programme by the government which needs the economy to circulate money as much as possible
d) Both (2) and (3)
e) Other than those given in options
Solution: Option (b)
Explanation: The Yield Curve Control is a measure that is aimed at ensuring that the banks in a country lend as much as possible to revive the economy and for that to happen, the yields on government bonds cannot be higher and that is why, the main objective of the programme is to control the long term interest rates as well as the short term interest rates in an economy.
2. Which among the following is true regarding the effect of the central bank buying back bonds from the market?
a) The central bank wants to reduce the availability of government bonds in the market so that the prices become higher and the returns on the bonds lower.
b) The central bank wants the banks to buy bonds and that can happen only when it starts buying these itself instead of waiting for regulated banks to make the move.
c) The central bank buys all the bonds from the market and it becomes mandatory for the government to issue the same bonds again in the market at higher rates.
d) The central bank wants to reduce the availability of currency in the economy.
e) Other than those given in options.
Solution: Option (a)
Explanation: Once the central bank of a country starts buying government bonds from the market, it reduces the availability of the bonds from the market. This makes the prices of the bonds higher and in the process, reduces the margin of return on those bonds in future. Adding to this, money also gets infused in the market by this process.
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3. Which among the following countries has decided to go for Yield Curve Control for the first time?
a) UK
b) USA
c) Japan
d) China
e) Other than those given in options
Solution: Option (c)
Explanation: The passage talks about the new policy adopted by Bank of Japan in order to control the short term as well the long term interest rates in the economy. This is called Yield Curve Control since it is mainly aimed at reducing the yield on the government bonds in the country.
4. Which among the following best expresses the effect of negative interest rates in an economy maintained by the central bank?
a) The central bank does not accept money from the commercial banks since that will require it to give interest to the banks.
b) The banks need to pay interest to the central bank in case it keeps the extra funds they have with the central bank.
c) The banks need to pay cash to the government in case they are investing in government bonds.
d) The banks need to pay in gold to the central bank instead of bonds because the foreign currency reserves are upgraded in the process.
e) Other than those given in options.
Solution: Option (b)
Explanation: Bank of Japan has maintained a negative rate of interest for both long term and short term funds since it wants the banks to lend most of the funds they have instead keeping it with the central bank. If the rate of interest is negative, that means that these banks need to pay extra interest to the central bank in case money is kept with the central bank. This makes the commercial banks rather lend money to public.
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5. Which among the following is true regarding the effect of Yield Curve Control on the government?
a) The government does not need to issue bonds in the market since there are no takers for the same in the market.
b) The government needs to understand that it is no more the lender but it is now the borrower and it should issue more bonds.
c) The government should go ahead with fiscal stimulus and borrow since the cost of borrowing is being tried to be kept near to zero.
d) The government should invest more in foreign currency reserves rather than gold in order to make it fiscally balanced.
e) Other than those given in options.
Solution: Option (c)
Explanation: The clear indication of the Yield Curve Control Programme by the Bank of Japan is that it wants to make it easier for the government to borrow money from the market as much as possible since it is required for the ailing and failing economy. In order to revive the economy, it is required for the government to borrow and this programme ensures that this cost of borrowing is kept at near zero.
6. Which among the following is true regarding the effect of Yield Control Curve programme on Indian economy?
a) There will no effect of the programme on Indian economy since this is a developing economy and the programme is suitable for developed economy only.
b) There will be effect on the central bank policies of all the developing countries since the countries need to deal with foreign cash flow into the economy.
c) There may be external shock in the future for Indian economy if capital flows into the country without any assurance of remaining here for some time.
d) There may be reason for the country to believe that Japan is heading towards a recession and India may stop its exports to the country.
e) Other than those given in options.
Solution: Option (c)
Explanation: According to the passage, if there is aggressive easing of monetary policy in Japan, there will be capital inflow to India and this may create asset bubble. This is because this type of capital is never stable in nature and capital flight is very common in this regard. It may lead to a situation where India becomes vulnerable to external shocks in the future easily without any proper safeguard.
7. Which among the following is similar in meaning to the word ‘perish’ as used in the passage?
a) Cancel
b) Disappear
c) Dispel
d) Counsel
e) Other than those given in options
Solution: Option (e)
Explanation: The given word in the passage has been used to indicate that the common perception regarding Yield Curve Control is not the same as discussed in the passage and therefore, the normal perception should be done away with but none of the given words makes it obvious, among the given options. That makes option (5) the right choice among the given options.
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8. Which among the following is similar in meaning to the word ‘vying’ as used in the passage?
a) Caring
b) Faring
c) Sharing
d) Competing
e) Concerning
Solution: Option (d)
Explanation: The word has been used in the passage in the sense that all the central banks from various countries are competing with each other to invent new tools in order to revive the ailing economies around the world. This makes option (4) the right choice among the given options as the synonym of the given word.
9. Which among the following is opposite in meaning to the word ‘pumping’ as used in the passage?
a) Sticking
b) Sucking out
c) Fading
d) Declaring
e) Other than those given in options
Solution: Option (b)
Explanation: The word has been used in the passage to indicate that money is being infused and that is why, the opposite should be to take out money from the economy. This makes option (2) the right choice among the given options.
10. Which among the following is the opposite word to the word ‘implicit’ as used in the passage?
a) Direct
b) Disturbed
c) Distressed
d) Disturbing
e) Other than those given in options
Solution: Option (a)
Explanation: The given word has been used in the passage in the sense that the programme launched by the central bank is about an indirect message to the government to go ahead with the fiscal stimulus programme in order to revive the ailing economy of the country. This makes option (1) the right choice among the given options.
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