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Direction: Read the following passage divided into five paragraphs carefully and answer the questions that follow: Paragraph 1. Global macroeconomic conditions are improving gradually. Normalisation of monetary policy is under way, led by the US Fed. Compression of yield rates of fixed income securities seems to have bottomed out. Turnaround of interest rates in major advanced economies is the logical outcome of the monetary policy normalisation. Would it pose serious policy challenges to emerging and developing economies (EDEs) such as India? Paragraph 2. Short-term capital flows such as portfolio investment by FIIs, hedge funds, venture capital and private equity flows are sensitive to interest spread between developed and developing countries. In the aftermath of the announcement of taper tantrum, EDEs suffered a setback due to sudden flight to safety based on the perception of a probable rise in interest rates in developed countries. Would this be repeated in the process of monetary policy normalisation going forward? Going by the principle of 'once bitten twice shy', central banks in EDEs are generally extra-cautious. However, one can argue that global capital flows depend on country-specific factors and therefore, broad generalisation may be inappropriate. The fallout of monetary policy normalisation in developed countries may not be as pervasive as the US taper tantrum announcement in 2013. Paragraph 3. Back home, while switching gears from accommodative to neutral monetary policy stance in February 2017, Monetary Policy Committee members cited both domestic and global factors that are likely to evolve overtime. While the normalisation of the monetary policy is on a slow track, the inflationary pressure in the domestic market is more benign than anticipated. Economists have started questioning if the neutral monetary policy stance in India is appropriate in view of the sustained surplus liquidity condition, negative output gap and low CPI inflation excluding the impact of hike in the house rent. Paragraph 4. Following demonetisation, deposit growth suddenly accelerated amidst poor offtake of credit. As a result, short-term money market rates, particularly overnight rates, crashed below the reverse repo rate on many occasions. In the absence of adequate government securities in its portfolio, the RBI was forced to hike incremental CRR by 100 per cent for a brief period. Paragraph 5. As soon as the Government authorized the RBI to issue g-secs (government securities) under the Market Stabilisation Scheme (MSS), the CRR hike was rolled back. The issuance of MSS securities involves cost to the exchequer. Currently, the RBI is struggling to suck out excess liquidity by using a variety of instruments such as Open Market Operations (OMOs), cash management bills, MSS securities, auction term reverse repos and fine-tuning operations on a daily basis at variable rates besides the usual fixed rate reverse repo. In the absence of a standing deposit facility, which requires amendment of the RBI Act, liquidity management will continue to face serious challenges under extreme situations.

What was the impact of demonetisation?

I. Short-term money market rates crashed below the repo rate.

II. Deposit growth suddenly accelerated.

III. Personal loan demand increased.

A)  All (I), (II) and (III)   

B)  Only (I) and (III)

C)  Only (II)              

D)  Only (I) and (II)

E)  Only (III)