Money & Banking is part of Economic Development. Below are notes on 13 sub-topics, followed by practice MCQs from State PSC and UPSC papers.

Banking Sector Reforms: Basel Norms, Asset Quality Review (AQR), and NPA Management

  • Banking Sector Reforms:
    • Narasimham Committee (1991): First set of financial sector reforms.
    • Narasimham Committee (1998): Second set of banking sector reforms; recommended greater autonomy for PSBs, merger of large Indian banks, autonomy to Development Financial Institutions.
    • Raghuram Rajan Committee (2008): Examined financial sector reforms post-global crisis.
    • Committee on Financial Sector Assessment (CFSA, 2006): Headed by Dr. Rakesh Mohan, undertaken by GoI & RBI for financial sector health checkup.
    • Financial Sector Reforms Post-1991: Included SARFAESI Act, Capital Adequacy norms, NPA management. FRBM Act (2003) is fiscal, not directly financial sector reform.
  • Basel Norms (Basel III in India):
    • Capital Adequacy Ratio (CAR): Amount banks must maintain as own funds against risk-weighted assets to offset losses from defaults. Decided by regulatory bodies (e.g., RBI), not individual banks.
    • Minimum Common Equity Tier 1 (CET1) Capital ratio: 5.5%.
    • Minimum Tier 1 Capital ratio: 7%.
  • 'India Vision 2020' was prepared by the S. P. Gupta Committee (under the Planning Commission).
  • A Detailed Project Report (DPR) covers elements such as Project Phasing, Project Financial Structuring, Project Cost, technical specifications, and implementation schedule.
  • "Project Progress" is NOT covered during the preparation of a DPR; it is a monitoring aspect tracked after project implementation begins.
    • Minimum Total Capital ratio: 9%.
    • Capital Conservation Buffer (CCB): 2.5% of Risk-Weighted Assets.
    • Minimum Total Capital Ratio + CCB: 11.5%.
  • Non-Performing Assets (NPA) & Management:
    • NPA Definition: A loan or advance where:
      • Interest and/or principal remain overdue for more than 90 days (term loan).
      • Instalment of principal or interest overdue for two crop seasons (short duration crops).
      • Bill remains overdue for more than 90 days (bills purchased & discounted).
    • Causes of NPA Upsurge: Lower economic growth, aggressive/reckless lending, inadequate legal provisions for loan recovery, system-based identification of NPAs (replacing manual).
    • Government's 4R Strategy: Recognition, Resolution, Recapitalisation, Reforms.
    • Bad Bank (Asset Reconstruction Company - ARC / Asset Management Company - AMC): An entity set up to acquire bad loans (NPAs) and other illiquid holdings from other financial institutions.
    • SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act): Passed in 2002. Empowers banks/financial institutions to recover bad loans without court intervention.
    • Insolvency and Bankruptcy Code (IBC): Came into force in 2016. IBBI (Insolvency and Bankruptcy Board of India) was established in 2016 to regulate IBC.
    • Prompt Corrective Action (PCA) Framework: RBI's framework to intervene early with banks showing signs of distress (e.g., high NPAs, low capital).
    • Scheme for Sustainable Structuring of Stressed Assets (S4A): RBI scheme for reworking the financial structure of big corporate entities facing genuine difficulties.
    • Inter-Creditor Agreement (ICA): Signed by Indian banks and financial institutions for faster resolution of stressed assets (₹50 crore or more) under consortium lending.
    • RBI Powers (Banking Regulation Act, 1949): Can issue directions for stressed asset resolution, examine on oath any director/officer, prohibit banks from specific transactions.
  • Other Key Concepts & Committees:
    • Public Credit Registry (PCR) Task Force: Constituted by RBI, headed by Y. M. Deosthalee, to develop a transparent, comprehensive, near-real-time PCR for India.
    • Advisory Board for Banking and Financial Frauds (ABBFF): Constituted by RBI. Conducts first-level examination of bank fraud cases. Periodically analyzes frauds & provides policy inputs.
    • Economic Capital Framework (ECF): Framework used by central banks to assess the capital required to cover potential losses.
    • Prevention of Money Laundering Act (PMLA), 2002: Became effective from July 1, 2005.
    • Interest Coverage Ratio (ICR): A firm's ability to service its debt (interest payments). Higher ICR indicates better ability to service debt (lower risk). Helps assess present and emerging risk.
    • SEBI (Securities and Exchange Board of India): Given statutory recognition in 1992, related to broader financial sector reforms.
    • K. V. Kamath Committee: Constituted by RBI for 'Resolution Framework for COVID-19 related Stress'.
    • Bank of Baroda: RBI slapped a ₹1 crore penalty for not monitoring the end-use of funds for a borrower.
  • Committees and Their Subjects (Match the following type):
    • Nayak Committee (1992): Availability of Credit to Small Scale Industries (SSI).
    • Tarapore Committee: Capital Account Convertibility.
    • Rajamannar Committee: Centre-state relations.
    • Arjun Sen Gupta Committee: Unorganised sector.
    • Rangarajan Committee: Disinvestment of shares in Public Sector Enterprises (PSEs).
    • Kelkar Committee: Tax Reform.
    • Malhotra Committee: Insurance Reform.
    • Leeladhar Committee: Related to consolidation of Public Sector Banks.
  • Sub-prime Crisis (2008, US):
    • Caused by widespread defaults in subprime home-loan repayments.
    • Led to failure of some U.S. banks.
    • Caused a crash in the Indian Stock Market and global financial crisis.
    • Not primarily caused by a sudden increase in oil prices.
  • Greece Financial Bailout (2011): Not the first time Greece received a financial bailout. Private lenders including banks also pledged support, offering easier repayment terms.

Commercial Banking: Structure, Functions, and Recent Reforms in India

  • State Bank of India (SBI) is India's largest commercial bank and often features in global top bank lists. HDFC Bank entered the Fortune Global 500 List in 2024 for the first time.
  • India Post Payments Bank (IPPB) is incorporated as a Public Limited Company. Its pilot branches started operations at Hyderabad and Varanasi.
  • A 'bank run' describes a panic situation where deposit holders rapidly withdraw cash from banks.
  • Acceptance of income tax payments is considered an agency function of commercial banks.
  • State Bank of India (SBI) was established in 1955 based on the recommendations of the A.D. Gorwala Committee (which led to the nationalization of the Imperial Bank of India).
  • As per RBI guidelines, minors above 10 years are permitted to open and operate savings bank accounts independently; they are generally not allowed to open current accounts.
  • Regional Rural Banks (RRBs) are statutory bodies established under the Regional Rural Bank Act, 1976.
  • The first Regional Rural Bank, "Prathama Grameen Bank", was set up on 2nd October, 1975.
  • RRBs must follow priority sector lending norms. Their basic aim is to develop the rural economy, and their area of operation is limited to specific regions (one or more districts).
  • RRBs are sponsored by Commercial Banks (not RBI), with shareholding typically: Government of India (50%), Sponsoring Bank (35%), State Government (15%).
  • A major problem faced by RRBs is the problem of loan recovery.
  • The Lead Bank Scheme aims for big banks to adopt particular districts for intensive development, including rapid branch expansion and focused credit delivery. The Service Area Approach was implemented under this scheme.
  • Bank of China received permission from RBI to offer regular services in India.
  • Recent Public Sector Bank mergers (2019-2020):
    • Punjab National Bank (Anchor) + Oriental Bank of Commerce + United Bank of India
    • Union Bank of India (Anchor) + Andhra Bank + Corporation Bank
    • Canara Bank (Anchor) + Syndicate Bank
    • Indian Bank (Anchor) + Allahabad Bank
  • The merger of Dena Bank and Vijaya Bank with Bank of Baroda took place on April 1, 2019.
  • Corporation Bank was established in Udupi, and Canara Bank was established under the leadership of Ammembal Subba Rao Pai. The founder of Corporation Bank was Khan Bahadur Haji Abdullah Haji Kasim Saheb Bahadur.
  • Payments Banks (PBs) can accept demand deposits up to a maximum balance of Rs. 2,00,000 per individual customer (revised from Rs. 1,00,000).
  • PBs can issue ATM/Debit cards, provide payment and remittance services, and distribute third-party financial products (like mutual funds, insurance, pension funds).
  • PBs must maintain Cash Reserve Ratio (CRR) with RBI. They are not allowed to lend or issue credit cards.
  • Mobile Companies and Supermarket Chains controlled by residents are eligible promoters for Payments Banks.
  • RBI can cancel a bank's license if the bank does not have adequate capital and earning prospects, fails to comply with the Banking Regulation Act, 1949, is unable to pay its depositors in full, or if public interest would be adversely affected.
  • The maximum Foreign Direct Investment (FDI) limit in Public Sector Banks is 20% (via government approval route).
  • FDI in Private Sector Banks is permitted up to 74% (49% under automatic route, and beyond 49% up to 74% under government approval route).
  • Both Commercial Banks and Cooperative Banks are distinct regulated banking entities in India.
  • Objectives of bank nationalization (1969, 1980): Removal of control by a few, provision of adequate credit to agriculture, small industries, and exports (priority sectors), expanding credit delivery to priority sectors, branch expansion, and ensuring depositors' security.
  • Major problem of Regional Rural Banks (RRBs) is loan recovery.
  • Areas included in Priority Sector Lending (PSL) are Agriculture, Micro & Small Enterprises (MSME), Education Loans, Housing Loans (up to certain limits), Export Credit, Social Infrastructure, and Renewable Energy.
  • Banks must pay Rs. 100 per day as compensation if an ATM transaction failure (cash not dispensed) is not corrected within seven days.
  • Correctly matched bank slogans:
    • Punjab National Bank: The Name you can Bank Upon
    • Union Bank of India: Good People to Bank with
    • HSBC: World's Local Bank
    • Bank of Maharashtra: One Family One Bank
  • Payments Banks accept deposits, provide payments and remittances services, and distribute third-party financial products, but are not allowed to lend or issue credit cards.
  • The Bretton Woods Conference resulted in the establishment of the World Bank and the International Monetary Fund (IMF).
  • Federal Bank is an Indian private sector bank, while Citi Bank, Standard Chartered Bank, and HSBC are foreign banks in India.
  • BSE (Bombay Stock Exchange) has imposed fines on companies for not appointing women directors.
  • Benefits of bank mergers include enabling large banks to borrow more from the market (supporting economic revival) and increased operational efficiency of the banking sector.
  • The Committee on Financial Sector Reforms 2008 in India was headed by Raghuram Rajan.
  • The Economic Advisory Council to the Prime Minister (PMEAC) once recommended phased dilution of Government stake in Public Sector Banks from 58% to 49%.
  • 'Core Banking Solutions' refer to the networking of a bank's branches, allowing customers to operate their accounts from any branch within the network.
  • Small Finance Banks (SFBs) aim to supply credit to small business units and small and marginal farmers, promoting financial inclusion.
  • 'Merchant Discount Rate' (MDR) is the charge to a merchant by a bank for accepting payments from customers through the bank's debit/credit cards.
  • Government of India's capital infusion into public sector banks has steadily increased over the last decade. The merger of associate banks with State Bank of India was completed in 2017.
  • Deposits are liabilities of a commercial bank, whereas advances (loans), investments, and money at call and short notice are assets.
  • Chairmen of public sector banks are selected by the Banks Board Bureau (now Financial Services Institutions Bureau - FSIB).
  • For wholly owned banking subsidiaries of foreign banks in India, at least 50% of the board members should be Indian nationals. However, there is a minimum capital requirement (e.g., Rs. 500 crore).
  • 14 private commercial banks were nationalized in 1969.
  • Demonetization of Rs. 500 and Rs. 1000 currency notes was announced on 8th November 2016.
  • State Bank of India is the largest Commercial Bank of India.
  • Time deposits are generally the most important component of the liabilities of commercial banks in India.
  • After the 2020 mega-mergers, there are 12 Public Sector Banks in India (including SBI).
  • In 2012, approximately 37% of all commercial bank branches (public, private, RRBs) were in rural areas.
  • The Small Industrial Development Bank of India (SIDBI) is headquartered in Lucknow (not Mumbai). Allahabad Bank (Kolkata), Indian Overseas Bank (Chennai), and Canara Bank (Bengaluru) are correctly matched with their historical/current headquarters.
  • Commercial Banks are the largest source of agricultural credit in India.
  • Credit to farmers (loans) is an asset for a commercial bank.
  • 6 banks were nationalized in 1980.
  • The impact of bank nationalization included increased total deposits, significantly increased priority sector lending, increased branch expansion, and enhanced security of depositors' funds.
  • In the pre-reform period, monetary, fiscal, and administrative connections for banking activities contributed to low profitability of commercial banks (e.g., administered interest rates, high SLR/CRR).
  • The Narasimham Committee recommended deregulation of interest rates and disfavored high Statutory Liquidity Ratio (SLR).
  • Priority Sector Lending by commercial banks has historically raised the level of NonPerforming Assets (NPAs).
  • Cash Reserve Ratio (CRR) requirements are applicable to Scheduled Commercial Banks only.
  • Statutory pre-emptions (like SLR and CRR) have been progressively decreased by the RBI over time, not increased.
  • State Bank of India is a commercial bank. Reserve Bank of India is the central bank.
  • Commercial banks create money by lending a part of their deposits (credit creation).
  • YES Bank launched a 'blended finance facility' to assist salt farmers of Rann of Kutch.
  • A loan offered by a group of lenders working together for a single borrower is called a Syndicate Loan.
  • FEMA stands for Foreign Exchange Management Act, 1999.
  • State Bank of India was declared the overall winner of the EASE 3.0 awards.
  • ICICI Bank launched 'Pocket', India's first digital bank on mobile phones.
  • Punjab National Bank (established 1894) was the first successful Indian commercial bank wholly owned and managed by Indians. Oudh Commercial Bank (1881) was earlier but failed.
  • Axis Bank launched the ‘GIG-A—Opportunities’ initiative to attract remote skilled workers.
  • Bancassurance means selling of insurance products through the bank's client base.
  • Bandhan Bank is among the relatively newer universal banks in the Indian banking scenario, having started operations in 2015.
  • HDFC Bank headquarters is located in Mumbai.
  • Indian Bank is a Public Sector Bank, ICICI Bank is a Private Sector Bank, CITI Bank is a Foreign Bank, and Saraswat Bank is a Cooperative Bank.

Cooperative Banks and Development Financial Institutions (DFIs)

  • Cooperative Banks:
    • Structure: Generally three-tier for agricultural credit (State Co-operative Bank, District Central Co-operative Bank, Primary Agricultural Credit Society).
    • Urban Cooperative Banks (UCBs):
      • Supervised and regulated by both Registrar of Cooperative Societies (State Govt.) and Reserve Bank of India (RBI).
      • Brought under purview of Banking Regulation Act, 1949 via an Amendment in 1966.
      • RBI can impose limitations (e.g., on Punjab and Maharashtra Cooperative Bank PMC Bank).
      • RBI revised 'Supervisory Action Framework' for UCBs (recent development).
      • Can issue equity and preference shares (as per recent reforms).
      • Number of UCBs was approximately 1645 as on March 2012.
    • Land Development Banks (LDBs): Part of the Cooperative Credit Structure, primarily provide long-term agricultural credit.
  • Development Financial Institutions (DFIs):
    • Regulation: EXIM Bank, National Housing Bank (NHB), and NABARD are regulated by RBI.
    • Deficit finance is not a part of the structure of the Indian financial system.
  • NABARD (National Bank for Agriculture and Rural Development):
    • Apex body to finance agriculture and rural development in India.
    • Established: 12th July 1982, by an Act of Parliament (on recommendations of B. Sivaraman Committee).
    • Role: Primarily a refinancing institution, not a direct finance source for individuals/corporations. Facilitates credit for agriculture and rural development (not agriculture only).
    • Ownership: Government of India acquired RBI's stake, making GOI 100% owner.
    • Rural Infrastructure Development Fund (RIDF): NABARD is the nodal agency for implementing and administering RIDF programmes.
    • SHGs: Promoted the concept of Self Help Groups (SHGs) for financing the poor, including the SHG Bank Linkage Programme (1992).
  • SIDBI (Small Industries Development Bank of India):
    • Established: April 1990.
    • Role: Operates mainly in relation to small industries (MSMEs). An apex institution for MSME finance.
  • NHB (National Housing Bank):
    • Established: 1988 (under NHB Act 1987).
    • Role: Apex financial institution for housing finance.
    • Schemes: Launched ₹10,000 crore Special Refinance Facility (SRF) 2021 to support Housing Finance Companies (HFCs).
    • Ownership: Government of India acquired RBI's stake, making GOI 100% owner.
  • EXIM Bank (Export-Import Bank of India):
    • Established: January 1, 1982 (under Export-Import Bank of India Act 1981).
    • Role: Provides finance for exports and imports.
  • MUDRA (Micro Units Development and Refinance Agency Limited):
    • Full Form: Micro Units Development and Refinance Agency Limited.
    • Established: 2015.
    • Schemes: Three schemes: Shishu (loans up to ₹50,000), Kishor (₹50,001 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
    • Focus: Provides easy loans up to ₹10 lakhs to micro and small entrepreneurs. Does not fund heavy/big industries.
    • Priority: SC/ST entrepreneurs are given priority.
    • Loan types: Includes business installment loan, commercial vehicle loan, etc.
    • Nature: A refinancing institution for microfinance, not a development and regulatory agency for medium scale industry.
  • NIIFL (National Investment and Infrastructure Fund Limited): Manages Master Fund, Fund of Funds, and Strategic Opportunities Fund. (Global Investment Fund is not one of its funds).
  • Chronological Order of DFIs Establishment (India): Industrial Finance Corporation of India 1. (IFCI): 1948 Industrial Credit and Investment Cor2. poration of India (ICICI): 1955 Industrial Development Bank of India 3. (IDBI): 1964 Industrial Investment Bank of India 4. (IIBI): 1985 (as IRBI) / 1997 (as IIBI) NABARD: 1982 5. NHB: 1988 6. SIDBI: 1990 7.
  • Chronological Order of Key Events in Rural Finance: Establishment of Regional Rural Bank 1. (RRB): 1975 Establishment of NABARD: 1982 2. Self Help Group Bank Linkage 3. Programme: 1992 Kisan Credit Card (KCC) Plan: 1998 4.
  • International DFIs:
    • World Bank:
      • Headquarters: Washington D.C.
      • Publication: Publishes "World Development Report."
      • World Bank Group Components: IBRD, IDA, IFC, MIGA, ICSID (International Centre for Settlement of Investment Disputes).
    • Asian Development Bank (ADB):
      • Headquarters: Manila, Philippines.
    • BRICS Development Bank (New Development Bank - NDB):
      • Launched: During the 6th BRICS Summit in Fortaleza, Brazil (2014).
  • Bhartiya Mahila Bank:
    • Headquarters: Mumbai. (Merged with SBI in 2017).

Deposit Insurance and Credit Guarantee Corporation (DICGC)

  • Established in 1978 by merging Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India (CGCI).
  • Governed by the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
  • Wholly owned subsidiary of the Reserve Bank of India (RBI).
  • Primary objective: provide deposit insurance and guarantee credit facilities.
  • Insured Banks: All commercial banks (including foreign banks operating in India), Local Area Banks (LABs), Regional Rural Banks (RRBs), all cooperative banks (State, Central, and Primary Cooperative Banks) functioning in India.
  • Deposits Not Insured: Deposits of foreign governments; Central/State governments; Inter-bank deposits; Deposits of State Land Development Banks and Primary Cooperative Agricultural Credit Societies; Any amount specifically exempted by DICGC with RBI's previous approval.
  • Insurance Coverage Limit: Maximum of ₹5 lakh per depositor per bank (principal and interest combined) for all accounts held in the same bank, irrespective of the nature or number of accounts.
  • If a depositor has accounts in different banks, each bank provides separate insurance coverage up to ₹5 lakh.
  • Premium: Paid by the insured banks to DICGC. Depositors do not bear the premium cost.
  • DICGC (Amendment) Bill, 2021: Ensures depositors get their insured money (up to ₹5 lakh) within 90 days if a bank is placed under moratorium by the RBI.

Financial Inclusion: Strategies, Schemes (e.g., PMJDY), and Digitalization

  • Financial Inclusion (FI): Delivery of financial services at an affordable cost to disadvantaged and low-income segments of society.
  • Objectives of FI: Extend financial services to the poor, unlock growth potential of weaker sections, extend financial sector into rural areas. (Shrinking banking infrastructure is NOT an objective).
  • Strategies for FI:
    • Lead Bank Scheme (LBS): Coordinates banking efforts in districts for financial development.
    • Business Correspondents (BCs)/Bank Saathis: Agents providing banking services (deposits, withdrawals, subsidies/benefits) in branchless/rural areas.
    • Payment Banks: Promote FI; accept demand deposits (up to ₹2 Lakh), issue debit cards (NOT credit cards), cannot undertake lending activities. Eligible promoters include mobile telephone companies, supermarket chains, NBFCs, etc.
    • Digitalization: Influenced by changing consumer behavior, financial inclusion & government initiatives, increased smartphone usage.
    • Priority Sector Lending (PSL): Mandates banks to lend a portion of their funds to specific sectors.
    • PSL Weaker Sections include: Small and Marginal Farmers, Artisans, SC/ ST, Beneficiaries of Differential Rate of Interest (DRI) scheme, Self-Help Groups, Distressed farmers indebted to non-institutional lenders, Persons with disabilities, Minority Communities (as notified by GoI).
    • Adoption of villages by bank branches: A direct step towards achieving financial inclusion.
  • Committees related to FI & Digitalization:
    • Nachiket More Committee (2014): Constituted to boost cashless transactions; recommended the creation of Payment Banks.
    • Dr. C. Rangarajan Committee (2008): Chaired the Government of India's Committee on Financial Inclusion.
  • Key Schemes for Financial Inclusion:
    • Pradhan Mantri Jan Dhan Yojana (PMJDY):
      • Launch: 28th August 2014.
      • Implemented by: Department of Financial Services, Ministry of Finance (with Scheduled Commercial Banks).
      • Objective: Universal access to banking facilities.
      • Key Features: Zero balance accounts, RuPay Debit Card, accidental insurance cover (₹2 Lakh for accounts opened after

its, easy money transfer, overdraft (OD) facility up to ₹10,000 for eligible account holders.

    • Pradhan Mantri Mudra Yojana (PMMY):
      • Launch: 2015.
      • Objective: Provide easy financial assistance (loans) to set up small businesses in manufacturing, trading, and services sectors.
      • Maximum Loan Limit: Up to ₹10 Lakhs.
      • Loan Categories:
      • Shishu: Up to ₹50,000.
      • Kishor: More than ₹50,000 and up to ₹5,00,000.
      • Tarun: More than ₹5,00,000 and up to ₹10,00,000.
      • Features: No insistence on collateral; meets both term loan and working capital requirements.
    • Stand-Up India Scheme:
      • Purpose: Promote entrepreneurship among SC/ST and women entrepreneurs.
      • Refinance: Provided through SIDBI (Small Industries Development Bank of India), not RBI.
    • Small Savings Schemes:
      • Classification includes: Postal deposits (savings account, recurring deposits, time deposits, monthly income schemes), Savings certificates (National Small Savings Certificates, Kisan Vikas Patra), Social Security Schemes (Public Provident Fund, Senior Citizens Savings Scheme).
    • Other FI Schemes: Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, Suraksha Bandhan Scheme.
    • HRIDAY (Heritage City Development and Augmentation Yojana): Not a financial inclusion scheme; related to urban development.
    • Bhamashah Rojgar Srijan Yojana (State-specific, Rajasthan): Provides bank loans up to ₹10 lakh on subsidised interest for young educated unemployed youth.
  • Digitalization & Fintech Landscape:
    • India's Fintech Unicorn Rank: 3rd worldwide (as per Statista).
    • India Post Payments Bank (IPPB):
      • Incorporated: 2016.
      • Launched: 2018.
      • Ownership: Public limited company, 100% GOI equity under the Department of Post.
      • Objective: Promote digital payments and remittances, offer basic financial services leveraging postal network.
      • Services: Savings accounts, life and general insurance, digital life certificate, domestic money transfer.
    • National Payments Corporation of India (NPCI): Promotes financial inclusion, launched RuPay card payment scheme.
    • RBI Dashboard for FI Progress: Antardrishti (to assess and monitor financial inclusion progress).
    • Insurance Penetration: Measured as the percentage of insurance premium to GDP.

Financial Markets: Money Market and Capital Market (Components, Instruments, Role)

  • Financial Markets: Mechanisms that enable the transfer of funds from savers to investors. Composed of Money Market and Capital Market.
  • Role of Financial Markets: Mobilize savings, facilitate efficient allocation of capital, provide liquidity, aid in price discovery, and reduce transaction costs.
  • Regulation of Capital Markets: The Securities and Exchange Board of India (SEBI) is the primary regulatory body for India's capital markets, including stock exchanges, mutual funds, venture capital funds, collective investment schemes, and credit rating agencies.
  • SEBI Establishment & Powers: Established in 1988 as a non-statutory body; granted statutory powers and autonomy through an ordinance on January 30, 1992, subsequently by the SEBI Act, 1992. The first female Chairperson is Madhabi Puri Buch.
  • Money Market: Deals with short-term funds and financial instruments (maturity less than one year).
  • Money Market Instruments:
    • Treasury Bills (T-Bills): Short-term debt instruments issued by the Central Government of India (not State Governments) through the RBI. Issued at a discount to face value (zero-coupon, no direct interest). Highly liquid. Common maturities: 91-day, 182-day, and 364-day. Only RBI and commercial banks are primary subscribers.
    • Commercial Paper (CP): Short-term, unsecured promissory notes issued by highly rated corporations and primary dealers for short-term borrowing. Issued at a discount.
    • Certificate of Deposit (CD): Shortterm, negotiable, unsecured instruments issued by banks and financial institutions, typically with maturities from 7 days to 1 year for banks.
    • Call Money/Notice Money: Shortterm finance for interbank transactions, typically for 1-14 days. It is the most volatile part of the organized money market.
    • Commercial Bills: Short-term, self-liquidating trade bills. The volume of bill finance in the Indian money market is relatively low. Re-discounting of bills is a source of short-term trade credit.
    • Collateralized Borrowing and Lending Obligations (CBLO): A money market instrument that allows entities to borrow/lend funds against eligible collateral.
  • Money Market Institutions (India): Include RBI, Commercial Banks, Bill Brokers, Merchant Bankers, and Non-Banking Financial Intermediaries.
  • Capital Market: Deals with long-term funds and financial instruments (maturity exceeding one year).
  • Capital Market Components:
    • Primary Market: Where new securities are issued for the first time (e.g., Initial Public Offering - IPO). Before an IPO, a company is privately held.
    • Secondary Market: Where existing securities are traded among investors. It provides liquidity to investors as securities can be bought and sold multiple times.
  • Capital Market Instruments:
    • Shares: Represent ownership in a company.
      • Equity Shares: Grant ownership, voting rights, and a share in the company's earnings and profits.
      • Preference Shares: Entitle holders to fixed dividends paid before equity shareholders, usually without voting rights.
      • Sweat Equity Shares: Issued to employees of the company as a reward for their contribution (e.g., intellectual property).
      • Blue Chip Shares: Stocks of nationally recognized, well-established, and financially sound companies known for quality, reliability, and profitability.
    • Debentures/Bonds: Debt instruments. Debenture holders are creditors of the company, receive fixed interest payments (not dividends), and typically do not have voting rights.
      • Government Securities (GSecs)/Gilt-edged securities: Bonds issued by Central and State Governments. Considered sovereign (risk-free) and are traded in the 'gilt-edged market'. RBI manages and services both Central and State Government Securities.
      • Zero-Coupon Bonds: Bonds issued at a discount to face value and redeemed at par, without periodic interest payments.
      • Corporate Bonds: Debt instruments issued by companies. The limit for Foreign Portfolio Investment (FPI) in outstanding corporate bonds was extended up to 15% in Union Budget 2020-21.
      • Convertible Bonds: Hybrid debt instruments that can be converted into equity shares. They often pay a lower interest rate due to the embedded conversion option.
    • Mutual Funds: Investment vehicles that pool money from multiple investors to invest in diversified securities. Regulated by SEBI.
      • Net Asset Value (NAV) represents the current investment value per unit.
      • Offer high liquidity, allowing easy buying and selling.
      • Open-ended funds: Do not have a fixed corpus or duration.
      • Close-ended funds: Have a fixed corpus and duration.
      • The Unit Trust of India (UTI) was historically a major mutual fund organization in India.
    • Exchange-Traded Funds (ETFs): Marketable securities that track an index, commodity, bonds, or a basket of assets. They trade like common stocks on exchanges throughout the day, experiencing continuous price changes. ETFs typically have lower fees and higher daily liquidity than traditional mutual funds; their NAV is not calculated only once at the end of the day.
    • Derivatives: Financial contracts whose value is derived from an underlying asset (e.g., futures, options, swaps, warrants, swaptions).
    • Hybrid Securities (Mezzanine Financing): Financial instruments that combine characteristics of both debt and equity. Used by companies to raise capital from investors.
  • Stock Exchanges (India):
    • Bombay Stock Exchange (BSE): Asia's First Stock Exchange (established 1875). Its benchmark index is SENSEX (Sensitive Index), composed of 30 blue-chip companies. A rise in SENSEX indicates an overall rise in prices of the shares of these constituent companies.
    • National Stock Exchange (NSE): Established in 1990, recognized by SEBI in 1993, and commenced operations in 1994. It was the first to introduce a transparent, screen-based trading system in the wholesale debt market (including government securities) in 1994. Its benchmark index is NIFTY. NSE and Singapore Exchange (SGX) received permission from SEBI to operate jointly in GIFT City.
    • NASDAQ: The first wholly electronic stock exchange, established in 1971.
    • OTCEI (Over-the-Counter Exchange of India): An Indian share market providing trading platforms for small and medium-sized companies.
    • Demutualization: The process of converting a stock exchange from a mutual (member-owned) organization into a shareholder-owned company, separating ownership from management.
    • T+0 Settlement: SEBI's new move to settle trades on the same day aims to enhance liquidity, reduce settlement and counterparty risk, and improve market efficiency by minimizing the impact of market volatility.
    • Insider Trading: The illegal practice of trading on the stock exchange to one's own advantage by having access to confidential, non-public information.
  • Depositories (India):
    • National Securities Depository Limited (NSDL): Established in 1996, India's first and largest electronic securities depository. It deals with dematerialized (electronic) shares. Promoted by NSE, IDBI, and UTI.
    • Central Depository Services Limited (CDSL): Jointly promoted by the Bombay Stock Exchange (BSE) and others (not the RBI).
  • New Initiatives/Concepts:
    • NIRVIK Scheme (2020-21): A new scheme announced by the Government of India for the Export sector to enhance credit availability.
    • RBI Retail Direct Scheme: Launched by RBI to provide a safe medium for small investors to invest in government securities. Investors can open and maintain government securities accounts online easily and free of cost with the RBI, investing in both Central and State Government Securities.
    • Sovereign Gold Bond Scheme (SGBs) and Gold Monetization Scheme (GMS): Government initiatives to bring idle gold into the economy and reduce India's reliance on gold imports. SGBs allow minimum investment of 1 gram of gold, maximum 4 kg/individual or 20 kg/trust, with an 8-year tenure (exit option after 5th year). These bonds are available in DEMAT and paper form, tradable on stock exchanges, and can be used as collateral for loans.
    • National Investment and Infrastructure Fund (NIIF): An investor-owned fund manager anchored by the Government of India in collaboration with leading global and domestic institutional investors. It is registered with SEBI as a Category II Alternate Investment Fund.
    • Infrastructure Investment Trusts (InvITs): Recognized as borrowers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Interest income and dividend income from InvITs distributed to investors are generally taxable.
  • Financial Terminology & Events:
    • Collateral: Asset(s) pledged by a borrower to guarantee repayment of a loan.
    • Hedging: A technique for avoiding or counteracting a risk by making a specific counteracting transaction.
    • Arbitrage: The simultaneous buying in one market and selling in another to profit from a price difference.
    • Sub-prime Crisis: Term associated with the economic recession, specifically the 2008 US housing market crisis.
    • Exchange Rates: State the value of one currency in terms of others.
      • Fixed Exchange Rates: Rates set by government decisions and maintained by government actions.
      • Floating Exchange Rates: Rates determined by market forces (supply and demand), with governments interfering only to smooth fluctuations.
      • Under the Bretton Woods System, exchange rates were fixed against the US dollar, which was convertible to gold.
    • Credit Rating Agencies (India): CRISIL, ICRA are prominent credit rating agencies in India. They are regulated by SEBI.
    • Devaluation of a currency: Improves the competitiveness of domestic exports in foreign countries.
    • Capital expenditure: Investment in fixed assets like acquiring new technology.
    • Dividend Yield: Annual dividend per share divided by the current stock price.
    • Beta: A numeric value that measures the fluctuations of a stock's price relative to changes in the overall stock market.
    • Syndicated Lending: Spreads the risk of borrower default across multiple lenders by having a group of lenders provide a loan to a single borrower. A syndicated loan can be a fixed amount of funds or a credit line.
    • Global Depositary Receipt (GDR): A certificate issued by a depositary bank representing shares of a foreign company, allowing foreign investors to invest in those companies.
    • Indian Financial System Code (IFSC): An alphanumeric code that uniquely identifies each bank branch participating in electronic funds transfer systems.
    • Forward Markets Commission (FMC): Formerly regulated commodity futures. Merged with SEBI in 2015, so SEBI now regulates commodity futures under the Ministry of Finance (Department of Economic Affairs).
    • Global Financial Stability Report: Released by the International Monetary Fund (IMF).
    • Indian Government Bond Yields: Influenced by actions of the United States Federal Reserve, actions of the Reserve Bank of India, inflation, and short-term interest rates.
    • Black Monday: Refers to the stock market crash in the USA in 1987.
    • Asian Financial Crisis (1990s): Seriously affected Indonesia, Thailand, Malaysia, and South Korea, caused by mismanagement of financial resources and over-valuation of local currencies.
    • SWIFT system (Society for Worldwide Interbank Financial Telecommunication): Inaugurated in 1973 (operational 1977).
    • Uruguay Round of GATT: Concluded in 1994.
    • World Trade Organization (WTO): Inaugurated in 1995.
    • 'Dalal Street' (Mumbai): Refers to the street in Mumbai where the BSE and other financial institutions are located.

Inflation: Types, Causes, Effects, and Monetary Policy Responses

  • Inflation Definition: Continuous or persistent increase in the general price level of goods and services over time.
  • Effects of Inflation:
    • Prices of goods increase; value/purchasing power of money falls/declines.
    • Domestic currency depreciates; exports become less competitive, imports get costlier.
    • Benefits: Debtors/Borrowers (repay with less valuable money), Profit earners, Speculators, Real-estate holders, Business people.
    • Harms: Creditors/Lenders, Fixed income earners (wage earners, pensioners), Bondholders (fixed payments lose real value).
    • Real Interest Rate = Nominal Interest Rate - Inflation Rate.
    • Creeping inflation (slow, mild) can be conducive for economic growth.
  • Deflation: Persistent fall in the general price level of goods and services. It increases the real value of money over time.
  • Disinflation: A fall in the rate of inflation (prices still rising, but at a slower rate). If inflation decreases but remains positive, it is not deflation.
  • Inflation Measurement:
    • A price index captures the change in the average price of a constant basket of commodities.
    • Inflation Rate (year x) = [(Price level (year x) - Price level (year x-1)) / Price level (year x-1)] × 100.
    • In India:
      • Reserve Bank of India (RBI) uses the Consumer Price Index (CPI) as the primary metric to measure retail inflation for monetary policy formulation (since April 2014).
      • CPI measures changes in prices of goods and services consumed by urban households/typical families, including services.
      • The weightage of food in CPI is generally higher than in WPI.
      • Wholesale Price Index (WPI): Measures average change in prices of commodities at the wholesale level. Includes Primary Articles, Fuel & Power, and Manufactured Products. Does not capture services.
      • CPI for Industrial Workers (CPIIW) is used for calculating Dearness Allowance (DA) of Central Government Employees.
      • Food Index considers primary food articles and manufactured food products.
      • Rising CPI and WPI growth indicate inflationary pressure.
  • Types of Inflation:
    • Headline Inflation: Total inflation in an economy, including volatile components like food and energy/fuel prices. It is more volatile than Core Inflation.
    • Core Inflation: Measures the change in average consumer prices after excluding volatile items (food and fuel) from the CPI. Provides a more stable measure of underlying inflationary pressures and is generally lower than headline CPI when food inflation is higher.
    • Creeping Inflation: Slow and mild rate of inflation.
    • Stagflation: A situation of high inflation combined with high unemployment and stagnant economic growth.
    • Hyperinflation: Very high and accelerating inflation (e.g., India experienced high inflation in 1974-75).
  • Causes of Inflation:
    • Demand-Pull Inflation: Occurs when aggregate demand rapidly outstrips aggregate supply ("Too much money chasing too few goods" - Coulbourn).
      • Causes: Rapid growth of aggregate demand, increased money supply/credit creation, deficit financing (by government), expansionary fiscal policies/stimulus, higher purchasing power (e.g., due to inflation-indexing wages), growing economy, increase in Forex reserves, depreciation of rupee (making imports costlier, boosting domestic demand).
      • Creation of new money to finance a budget deficit is generally the most inflationary.
    • Cost-Push Inflation: Caused by a shift in the aggregate supply curve due to increased costs of production.
      • Causes: Increase in wages, sharp increase in international prices of crude oil, disruption of global supply chains, high freight costs, supply shortages (e.g., due to famine, decreased aggregate output, issues with agricultural output like monsoons), increase in exports (reducing domestic supply).
    • Specific instances: Sharp increase in foodgrain prices (e.g., 2008-09 CPI spike) and factors like decreased economic activity post-Covid can contribute to WPI increase.
  • Monetary Policy Responses to Inflation (RBI in India):
    • Flexible Inflation Targeting Framework:
      • RBI Act, 1934 was amended in May 2016 to provide a statutory basis for this framework.
      • The Central Government, in consultation with RBI, determines the inflation target in terms of CPI, once every five years.
      • The inflation target (2016-2021 and retained for 2021-2026) is 4% with a tolerance band of ± 2% (i.e., 2% to 6%).
      • RBI is required to make a report to the government if the inflation target is not maintained for three consecutive quarters.
    • Tools to curb inflation: Increase policy rates (e.g., Repo Rate, Reverse Repo Rate), increase Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), open market operations (selling government securities to absorb liquidity). When demand for money increases with constant supply, interest rates increase.
    • Limitations of anti-inflationary monetary policy: Commercial Banks Portfolio Adjustment, Growth of NonBank Financial Intermediaries, Risk of destabilisation.
    • Monetary policy is less effective when inflation is caused by supply shortages of goods.
  • Miscellaneous:
    • The Phillips Curve represents the inverse relationship between inflation and unemployment.
    • RBI regularly conducts the 'Inflation Expectations Survey of Households'.
    • Hawtrey propagated the Pure Monetary Theory of Trade Cycle.

Monetary Policy Committee (MPC): Structure, Mandate, and Functioning

  • Monetary Policy (MP) of India is formulated by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI).
  • RBI is the highest policy-making body for monetary matters in India.
  • MPC was established under the Reserve Bank of India Act, 1934 (amended in 2016).
  • The concept of flexible inflation targeting was proposed by the Urjit Patel Committee.
  • Mandate: To maintain price stability (primarily by targeting inflation) while keeping in mind the objective of growth.
  • The inflation target is set by the Government of India, in consultation with the RBI, for five years (currently 4% with a +/- 2% tolerance band).
  • Structure: Six members.
    • Three ex-officio members from RBI: Governor of RBI (Chairperson). 1. Deputy Governor in charge of 2. monetary policy. One officer of RBI nominated 3. by the Central Board.
    • Three external members nominated by the Central Government, selected by a Search-cum-Selection Committee (RBI Governor is a member of this committee).
  • Term for external members: Four years, not eligible for re-appointment.
  • Chairperson: RBI Governor.
  • Quorum: Four members for a meeting to be valid.
  • Decision Making: Decisions are taken by majority vote.
  • Casting Vote: In case of a tie, the RBI Governor has a casting vote.
  • Key Function: Decides the RBI's benchmark interest rates (e.g., Repo Rate) to achieve the inflation target.

Monetary Policy: Objectives, Instruments (quantitative and qualitative), and Transmission Mechanism

qualitative),

and

Transmission Mechanism

  • Monetary Policy (MP): Macroeconomic policy laid down by the Central Bank (RBI) to manage money supply and credit conditions in an economy.
  • Monetary Policy Committee (MPC): A sixmember committee (3 RBI officials, 3 external members appointed by GoI) responsible for determining the policy interest rates (Repo Rate) in India to achieve the inflation target.
  • Objectives of Monetary Policy:
    • Price Stability (primary objective, controlling inflation).
    • Economic Growth (supporting sustainable growth).
    • Financial Stability (maintaining a robust financial system).
    • Exchange Rate Stability (managing currency value).
    • Full Employment (indirect objective, through economic growth).
    • Note: Social justice, reducing budgetary deficit, or regulating foreign trade are not direct objectives of MP.
  • Instruments of Monetary Policy:
    • Quantitative Instruments (General Credit Control): Affect overall supply and cost of money in the economy.
      • Bank Rate (or Discount Rate): The official rate of interest at which the Central Bank lends money to commercial banks without any collateral, usually for long-term purposes. An increase indicates a tight money policy.
      • Repo Rate (Repurchase Option Rate): The interest rate at which the RBI provides overnight/short-term liquidity to commercial banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF). It is paid by commercial banks when borrowing from RBI.
      • Repo Rate > Reverse Repo Rate / SDF Rate.
      • Increase in Repo Rate: Contractionary (decreases money supply, raises borrowing cost for banks, helps control inflation).
      • Decrease in Repo Rate: Expansionary (increases money supply, lowers borrowing cost for banks, boosts growth).
      • Reverse Repo Rate (Reverse Repurchase Option Rate): The interest rate at which the RBI borrows (absorbs) liquidity from commercial banks by lending government securities as collateral under the LAF. RBI pays this rate to banks.
      • Standing Deposit Facility (SDF) Rate: Introduced in April 2022. It replaced the fixed reverse repo rate as the floor of the LAF corridor. Allows banks to deposit funds with RBI without collateral. Used to absorb liquidity.
      • Marginal Standing Facility (MSF) Rate: A window for commercial banks to borrow funds from the RBI overnight, at a rate higher than the Repo Rate, when inter-bank liquidity dries up. It serves as a penal rate. MSF Rate > Repo Rate.
      • Liquidity Adjustment Facility (LAF): A framework used by the RBI to manage liquidity in the banking system, comprising overnight/short-term repo and reverse repo (now SDF) operations.
      • Cash Reserve Ratio (CRR): The share of Net Demand and Time Liabilities (NDTL) that commercial banks must hold as balances with the RBI. No interest is paid by RBI on CRR balances.
      • Increase in CRR: Reduces banks' lendable funds, decreases money supply, contractionary.
      • Decrease in CRR: Increases banks' lendable funds, increases money supply, expansionary.
      • Statutory Liquidity Ratio (SLR): The share of NDTL that commercial banks must maintain in the form of liquid assets (cash, gold, unencumbered approved government securities) with themselves.
      • Increase in SLR: Reduces banks' lendable funds, contractionary.
      • Decrease in SLR: Increases banks' lendable funds, expansionary.
      • Open Market Operations (OMOs): The buying and selling of Government Securities (G-Secs) in the open market by the RBI. OMOs are an indirect credit control technique.
      • Sale of G-Secs by RBI: Absorbs liquidity from the banking system/public, decreases money supply, contractionary.
      • Purchase of G-Secs by RBI: Injects liquidity into the banking system/public, increases money supply, expansionary.
      • OMOs are also used for "sterilization" to offset the liquidity impact of foreign exchange interventions.
      • RBI conducts fine-tuning operations through OMOs to manage daily liquidity.
      • Market Stabilisation Scheme (MSS): Launched in 2004, it is an additional channel to mop up liquidity from the system, typically arising from large capital inflows, by issuing government securities.
      • Quantitative Easing (QE): An unconventional monetary policy where the central bank buys large quantities of long-term government bonds or other financial assets to inject liquidity into the economy, typically when short-term interest rates are near zero.
      • Credit Multiplier: Calculated as 1 / (CRR + ER + PR), where ER is Excess Reserve Ratio and PR is People's Cash Withdrawal Ratio.
    • Qualitative Instruments (Selective Credit Control): Affect the direction or flow of credit to specific sectors.
      • Margin Requirements: The percentage of the loan value that borrowers must contribute from their own funds. Increasing margins discourages borrowing for specific purposes.
      • Credit Rationing: Directing commercial banks to provide or restrict credit to certain sectors or for specific activities.
      • Moral Suasion: Persuading commercial banks through advice, suggestions, or pressure to follow certain monetary policy directives.
      • Direct Action: Imposing penalties on commercial banks for non-compliance with RBI directives.
  • Monetary Policy Transmission Mechanism: The process through which changes in monetary policy instruments (like policy rates) influence aggregate demand and inflation in the economy.
    • Channels:
      • Interest Rate Channel: Changes in policy rates affect various market interest rates (lending, deposit rates), influencing borrowing costs for households and firms, thereby impacting consumption and investment.
      • Exchange Rate Channel: Policy rate changes affect capital flows, influencing the exchange rate, which impacts exports and imports.
      • Asset Price Channel: Policy rate changes affect asset prices (e.g., bonds, equities, real estate), influencing wealth and investment decisions.
      • Credit Channel: Policy changes affect bank lending capacity and willingness.
    • Indicators for observing transmission: Weighted average lending rate, weighted average domestic term deposit rate, 1-year median MCLR (Marginal Cost of Funds based Lending Rate).
    • Marginal Cost of Funds based Lending Rate (MCLR): RBI guidelines aim to improve transparency in bank lending rates and ensure fair rates for borrowers and banks.
    • Impact of Policy Actions:
      • Contractionary (Tight) Monetary Policy: Increase policy rates (Repo, Bank, MSF), increase CRR/SLR, sell G-Secs. Leads to higher interest rates, reduced money supply, decreased investment/consumption, currency appreciation, reduced inflation.
      • Expansionary (Easy/Cheap) Monetary Policy: Decrease policy rates, decrease CRR/ SLR, buy G-Secs. Leads to lower interest rates, increased money supply, increased investment/consumption, currency depreciation, potentially higher inflation.
  • Related Concepts:
    • Impossible Trinity: Refers to the inability to simultaneously achieve a fixed exchange rate, monetary independence, and capital account openness.
    • Taylor's Rule: A rule that suggests how the central bank should change the nominal interest rate in response to changes in inflation and output gaps; often implies the nominal rate increases by more than 1 percentage point if inflation rises by 1 percentage point.
    • Demonetization: An act of stripping a currency unit of its status as legal tender. It's a part of monetary policy to decrease money supply, control inflation, and combat black money.
    • Financial Reforms Committee (e.g., Chakravarty Committee 1985): Known for reforms of the monetary system.
    • Devaluation of Currency: Official lowering of the value of a country's currency relative to other currencies. Leads to increased domestic prices (inflationary). India devalued rupee in 1949, 1966, and 1991.

Money: Functions, Forms, and Measures of Money Supply

  • Functions of Money:
    • Medium of Exchange: Facilitates transactions, eliminates need for double coincidence of wants inherent in barter.
    • Unit of Account (Measure of Value): Provides a common standard for quoting prices and measuring the value of goods, services, and debts.
    • Store of Value: Allows wealth to be held over time for future purchases, though purchasing power can be affected by inflation.
    • Standard of Deferred Payment: Provides a basis for specifying payments in future contracts (e.g., loans).
  • Forms of Money:
    • Commodity Money: Has intrinsic value independent of its use as money (e.g., gold, silver, cigarettes in POW camps).
    • Fiat Money (Legal Tender): Money whose value is not derived from any physical commodity but is declared by government decree to be legal tender. It must be accepted for settlement of debts.
      • In India, currency notes and coins are legal tender.
      • One Rupee Note: Issued by the Government of India (Ministry of Finance), signed by the Finance Secretary.
      • All other denomination notes: Issued by the Reserve Bank of India (RBI).
    • Optional Money (Non-legal Tender): Accepted voluntarily, not legally binding for debt settlement (e.g., Cheques, Demand Drafts, Pay Orders/ Banker's Cheques).
    • Plastic Money: Credit Cards, Debit Cards.
    • Cryptocurrencies: Digital or virtual currencies (e.g., Ethereum, Solana, Polkadot, Tether).
      • Not legal tender in India.
      • Income from cryptocurrency is taxable in India.
    • Paper Gold: Refers to Special Drawing Rights (SDR) of the International Monetary Fund (IMF).
      • SDR basket currencies include US Dollar, Euro, Japanese Yen, British Pound Sterling, and Chinese Renminbi (added in 2016).
    • Hard Currency: A stable and widely accepted currency in international trade.
    • Soft Currency: A currency whose value fluctuates significantly due to political or economic uncertainty in its issuing country.
    • Indian Rupee Symbol (₹): Officially adopted on July 15, 2010.
    • Decimal Coinage System in India: Introduced in 1957.
    • Demonetization (India, 2016):
      • On November 8, 2016, the Government of India demonetized all Rs. 500 and Rs. 1000 banknotes of the Mahatma Gandhi Series.
      • New Rs. 2000 denomination notes were introduced immediately after.
      • Printing of Rs. 2000 notes stopped in 2018-19.
      • Withdrawal of Rs. 2000 notes from circulation (May 2023) is part of RBI's Clean Note Policy, aiming to provide high-quality currency.
  • Measures of Money Supply (RBI Classification):
    • Liquidity Hierarchy (Decreasing Order): Currency > Demand Deposits > Savings Deposits > Time Deposits.
    • Measures by RBI (Decreasing Liquidity): M1 > M2 > M3 > M4.
    • M0 (Reserve Money / High-Powered Money / Base Money):
      • Total liability of the Monetary Authority of India (RBI).
      • M0 = Currency in Circulation (C) + Bankers' Deposits with RBI (R) + 'Other' Deposits with RBI (OD).
      • Deposits with RBI are refundable on demand.
    • M1 (Narrow Money):
      • M1 = Currency with the Public (CU) + Demand Deposits (DD) + 'Other' Deposits with RBI (OD).
      • Demand Deposits include net demand deposits of commercial banks (current and savings accounts, excluding inter-bank deposits).
      • 'Other' Deposits with RBI include deposits of quasi-government institutions, foreign central banks, international financial institutions (IMF, World Bank), etc., excluding deposits of Government of India and commercial banks.
      • M1 is the most liquid measure of money supply.
    • M2:
      • M2 = M1 + Savings Deposits of Post Office Savings Banks.
    • M3 (Broad Money / Aggregate Monetary Resources):
      • M3 = M1 + Net Time Deposits of Commercial Banks.
      • Components: Currency with the public, net demand deposits of commercial banks, 'other' deposits with RBI, and net time deposits of commercial banks.
      • M3 is the most commonly used measure of money supply in India.
    • M4:
      • M4 = M3 + Total Deposits with Post Office Savings Organizations (excluding National Savings Certificates).
      • M4 is the least liquid measure of money supply.
  • Money Multiplier:
    • Indicates how much the money supply in an economy changes for a given change in the monetary base (M0).
    • Money Multiplier (MM) = 1 / (Cash Reserve Ratio + Currency Deposit Ratio). (Simplified formula).
    • Factors that increase Money Multiplier:
      • Increase in the banking habit of the population (reduces currency-deposit ratio).
      • Decrease in Cash Reserve Ratio (CRR).
      • Decrease in Statutory Liquidity Ratio (SLR).
    • Impact of holding more currency: If people hold more currency in hand and less in deposits, the money multiplier will decrease.
    • Cash withdrawal impact: Withdrawing cash from a demand deposit account (e.g., ₹1,00,000) does not change the aggregate money supply (M1 or M3) but shifts it from demand deposits to currency with the public.
  • Other Important Concepts:
    • Gresham's Law: "Bad money drives out good money." Occurs when two forms of money with the same legal tender value but different intrinsic values circulate, leading to hoarding, melting, or exporting of the 'good' money.
    • Prevention of Money Laundering Act (PMLA):
      • Covers major offenses generating black money (e.g., tax evasion, smuggling are considered predicate offenses).
      • Cases under this Act are typically non-bailable.
      • The Director of Money Laundering is empowered to call for records from Financial Institutions (FIs).
    • Closed Economy: An economy with no international trade or financial flows. Consequently, its Balance of Payments is zero (i.e., external transactions are non-existent or perfectly balanced).
    • Household Savings in India: Physical assets (e.g., real estate, gold) historically constitute the highest share in household savings.
    • Exchange Value of Money (Currency):
      • High inflation rate tends to depreciate currency.
      • High fiscal deficit tends to depreciate currency.
      • High crude oil prices (for oilimporting economies) tend to depreciate currency.
    • "The Problem of Rupee": A book written by Dr. B.R. Ambedkar in 1923.
    • Money Supply Growth in India (since 1990s): Often influenced by factors like RBI credit to the government (monetization of fiscal deficit) and foreign capital inflows.

Non-Banking Financial Companies (NBFCs): Types, Regulation, and Significance

Non-Banking Financial Companies (NBFCs) 1. are financial institutions that provide banking services without holding a banking license. NBFCs cannot accept demand deposits. 2. NBFCs cannot issue cheques drawn on them3. selves. NBFCs cannot offer the deposit insurance 4. facility of Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFCs cannot access the Liquidity Adjust5. ment Facility (LAF) window of the Reserve Bank of India (RBI). NBFCs can give loans, make investments, 6. and borrow from banks. RBI influences the regulatory and supervis7. ory standards of NBFCs. The Ombudsman Scheme for Non-Banking 8. Financial Companies (NBFC), 2018, was introduced by RBI, effective 23 February, 2018. AC Shah Committee was formed for reforms 9. in NBFCs. Micro credit in India comes under Non10. Banking Finance. Microfinance Institutions (MFIs) are a type 11. of NBFC. Borrowers from Microfinance Companies 12. have annual income and loan amount limits. Microfinance borrowers are generally not 13. required to offer collateral. The Malegam Committee recommended in14. terest rate caps for micro-finance institutions due to high interest rates leading to suicides. Micro Units Development and Refinance 15. Agency Ltd. (MUDRA Ltd.) schemes (Sishu, Kishore, Tarun) aim at financing Micro and Small Enterprises. The RBI allowed Small Industries Develop16. ment Bank of India (SIDBI) to use a corpus for lending to Microfinance Institutions (MFIs). Housing Finance Company (HFC) is an 17. NBFC providing loans following national housing guidelines and RBI directives. Indian Renewable Energy Development 18. Agency Limited (IREDA) is a Public Limited Government Company and also a Non-Banking Financial Company (NBFC). Neo banks are financial institutions with only 19. an online presence, function digitally, and offer banking services (e.g., savings accounts, small loans, debit cards). Neo banks typically partner with licensed 20. banks for operations, rather than holding a full banking license from RBI themselves. The Insurance Regulatory and Development 21. Authority of India (IRDAI) is a Statutory Body. The IRDA Act was passed in 1999. 22. IRDAI regulates the insurance business in In23. dia. In India, credit rating agencies are regulated 24. by SEBI, not RBI. ICRA is a public limited company; Brick25. work Ratings is an Indian credit rating agency. Foreign Institutional Investors (FIIs) can hold 26. Government Securities (G-Secs) in India. Stock Exchanges in India can offer separate 27. trading platforms for debts. Non-financial debt includes housing loans 28. owed by households and amounts outstanding on credit cards.

Payment Systems in India: Digital Payments, UPI, and Central Bank Digital Currency (CBDC)

  • National Payments Corporation of India (NPCI):
    • Umbrella organization for retail payments & settlement system in India.
    • Joint initiative of RBI & Indian Banks' Association (IBA).
    • Incorporated in 2008 as a 'Not for Profit' company (Section 8 of Companies Act).
    • Major Products/Services: RuPay card, UPI, BHIM app, National Financial Switch (NFS), IMPS.
  • RuPay Card: Launched by NPCI; India's domestic payment card scheme.
  • Unified Payments Interface (UPI):
    • Developed by NPCI.
    • Enables instant real-time inter-bank electronic funds transfer via mobile phones.
    • Likely consequence: Mobile wallets may not be necessary for online payments.
    • Payment Vision 2025 aims to link credit cards with UPI.
  • BHIM (Bharat Interface for Money) App: Mobile app launched by NPCI to make India cash-free.
  • National Financial Switch (NFS): Largest network of shared ATMs in India, run by NPCI, links all ATMs in India.
  • IMPS (Immediate Payment Service): Instant real-time inter-bank electronic funds transfer service through mobile phones.
  • Committees on Digital Payments:
    • Nandan Nilekani Committee (2019): Appointed by RBI for Deepening Digital Payments.
    • Ratan Watal Committee (2016): Formed for Digital Payments.
  • Digital Payments Index (DPI): Released by Reserve Bank of India (RBI).
  • Payment Banks: Airtel Payment Bank was India's first (operations started Nov 2016).
  • ATM Types:
    • Onsite ATM: Situated within or near a bank branch.
    • White Label ATM (WLA): Set up, owned, operated by Non-Banking institutions.
    • Brown Label ATM (BLA): Hardware & ATM machine owned by a service provider; bank branding & cash management by the bank.
    • Worksite ATM: Located within premises of an organization for its employees.
    • Cardless Cash Withdrawal: SBI offers this facility (e.g., via YONO app).
  • NEFT (National Electronic Funds Transfer): Related to electronic money transfer by NetBanking/branch.
  • TReDS (Trade Receivables Discounting System):
    • RBI initiative to help cash-starved MSMEs promptly encash receivables.
    • Online bill discounting platform for MSME sellers against corporates (including Govt. departments, PSEs) through auction.
  • Escrow Account: A neutral third-party bank account for safeguarding funds/assets until specific contractual conditions are met, protecting both buyer and seller from default risks.
  • Hawala Transactions: Payments received in rupees against overseas currencies (or viceversa) without going through official channels (illegal).
  • Prepaid Payment Instruments (PPIs): Instruments that facilitate purchase of goods/ services against value stored on them.
    • Examples: Delhi Metro Rail Card, Electronic Wallets (e.g., Airtel Money).
    • Not a PPI: Credit Card (it's a credit instrument).
    • RBI states PPI users have no liability if fraud reported within 3 days.
  • RBI's 'Storage of Payment System Data' (Data Diktat):
    • Payment system providers must ensure entire data related to payment systems are stored only in India.
    • System audit reports submitted to RBI (not CAG).
    • Applies to all payment system providers, not just public sector enterprises.
  • RBI's Payment Vision 2025 (July 17, 2022):
    • RBI's vision on 'Architecture of Digital Finance'.
    • Includes Bigtechs & Finetechs in payments.
    • Aims to link Credit Cards with UPI.
    • Does not include introducing Bitcoin currency or delinking Credit Cards from UPI.
  • Central Bank Digital Currency (CBDC) / Digital Rupee:
    • Sovereign currency issued by RBI, aligns with its monetary policy.
    • Appears as a liability on RBI's balance sheet.
    • Freely convertible against commercial bank money and cash.
    • Forms: Token-based (bearer instrument, like cash) and Account-based (ledger entry, like bank money).
    • Key Features: Possible to make payments without using US dollar or SWIFT system. Can be distributed with conditions (e.g., time-frame for spending) due to programmability.
    • Not inherently insured against inflation by its very design.
  • MICR (Magnetic Ink Character Recognition) Code: 9-digit code.
  • Cashless Economy: Sweden is often considered the world's first country moving towards a cashless economy.

Reserve Bank of India (RBI): Role, Functions, and Autonomy

  • Establishment & History:
    • Established: April 1, 1935, under the Reserve Bank of India Act, 1934.
    • Recommended by: Hilton Young Commission (Royal Commission on Indian Currency and Finance).
    • Headquarters: Mumbai (initially Kolkata).
    • First Governor: Sir Osborne Smith.
    • First Indian Governor: C.D. Deshmukh.
    • Current Governor (as of recent updates): Shaktikanta Das.
    • Nationalized: January 1, 1949.
    • Financial/Accounting Year: July 1 June 30.
    • Insignia: Palm tree and Tiger.
    • Central Records and Documentation Centre (CRDC): Established August 24, 1981, belongs to RBI.
  • Core Functions (Central Monetary Authority):
    • Formulates, implements, and monitors monetary policy to maintain price stability (controlling inflation) while considering growth.
    • Manages the monetary system and regulates credit in the economy (Credit Control).
    • Sets key policy rates (e.g., Repo Rate, Reverse Repo Rate) and reserve ratios (CRR, SLR).
    • Power to fix CRR/SLR is granted under the RBI Act.
    • Responsible for maintaining price stability by controlling inflation.
  • Currency Issuer:
    • Sole authority for issuing currency notes in India (excluding one-rupee notes and coins).
    • One-rupee notes and all coins are issued by the Ministry of Finance, GoI, and bear the Finance Secretary's signature.
    • All other currency notes (₹2 and above) are issued by RBI and bear the RBI Governor's signature.
    • Change in currency note design requires approval from RBI's Central Board and the Central Government.
    • Follows the Minimum Reserve System for note issue: maintains a minimum reserve of ₹200 crores (₹115 crores in gold, ₹85 crores in foreign securities).
    • Department of Currency Management (DCM) administers currency functions.
    • Currency note printing presses:
      • Government of India owned: Dewas (Madhya Pradesh), Nashik (Maharashtra).
      • RBI owned (BRBNMPL): Salboni (West Bengal), Mysore (Karnataka). Hyderabad is NOT among these.
    • First banknote issued by RBI (January 1938) bore the portrait of George VI.
    • Deals with Fake Indian Currency Notes (FICN).
    • Demonetization was last implemented in 2016 and enacted under the Reserve Bank of India Act.
  • Banker to Government:
    • Manages Central and State Government accounts.
    • Handles the government's borrowing program and manages public debt.
    • Acts as an agent of the Government regarding India's membership of the IMF.
    • Provides Ways and Means Advances (short-term loans) to the government.
  • Banker to Banks (Supervisor and Regulator):
    • Maintains banking system stability and acts as the 'Lender of Last Resort' for commercial banks (providing liquidity during temporary crises).
    • Custodian of cash reserves of commercial banks (CRR).
    • Controls credit operations of scheduled banks.
    • Regulates commercial banks in matters of liquidity of assets, branch expansion, merger, and winding-up.
    • Issues licenses to open domestic and foreign banks.
    • Manages Real Time Gross Settlement (RTGS).
    • E-Kuber: RBI's core banking solution giving commercial banks high access to their current accounts with RBI, used for auctioning government securities.
    • The Banking Regulation (Amendment) Bill, 2020, provided RBI with regulatory powers over Cooperative Banks.
    • Declares Domestic Systemically Important Banks (D-SIBs), which currently include State Bank of India, ICICI Bank, and HDFC Bank.
  • Manager of Foreign Exchange:
    • Manages the Foreign Exchange Management Act (FEMA).
    • Custodian and manager of the country's foreign exchange reserves.
    • Facilitates external trade, payments, and promotes orderly development of the foreign exchange market.
  • Developmental Role:
    • Promotes banking habits and extends banking facilities to rural and semiurban areas.
    • Sets up specialized financing agencies.
    • Launched initiatives like the 'Green banking channel' and financial literacy modules ('Hisaab ki Kitaab').
  • Committees/Schemes:
    • Meena Hemachandra Committee: Constituted by RBI on Cyber Security.
    • Bimal Jalan Committee: Constituted to examine RBI's Economic Capital Framework (ECF).
    • Gold Monetization Scheme: Introduced in 2015.
  • Not a function of RBI:
    • Lending money directly to the public.
    • Regulation of foreign trade.
    • Act as tax collector for the Government of India.
    • Finalization of the Union Budget.
    • Taking decisions regarding the use of deficit financing to close the gap between government revenues and expenditures.

Practice MCQs: Money & Banking

Banking Sector Reforms: Basel Norms, Asset Quality Review (AQR), and NPA Management

  1. Which of the following statements is not correct regarding Basel III implementation in India ?

    Asked in: APSC CCE Prelims Exam 2018

    1. Minimum Tier 1 capital ratio should be 8%
    2. Tier 2 capital should be maximum 2%
    3. Minimum total capital ratio should be 9%
    4. Minimum total capital ratio plus capital conservation buffer should be 11.5%
    Show answer

    Answer: B. Tier 2 capital should be maximum 2%

    Under Basel III norms (as implemented by RBI), while Tier 2 capital is part of total regulatory capital, there is no specific maximum limit set at 2% of Risk Weighted Assets (RWA). The amount of Tier 2 capital recognised for regulatory purposes is limited to a maximum of 100% of Tier 1 capital.

  2. Which of the following is/are correct about a Bad Bank? (i) A bank that is insolvent (ii) A bank that has become bankrupt (iii) A bank whose NPAs have crossed the tolerable limit (iv) A bank set up to buy bad loans and other illiquid holdings of another financial institution Select the correct answer using the codes given below.

    Asked in: APSC CCE Prelims Exam 2023

    1. (i) and (ii) only
    2. (ii) and (iii) only
    3. (iii) only
    4. (iv) only
    Show answer

    Answer: D. (iv) only

    - Statement (i) is incorrect: A bad bank is not necessarily an insolvent bank itself; it is a tool used to deal with the insolvency risk arising from bad loans held by other banks. - Statement (ii) is incorrect: A bad bank is not a bank that has become bankrupt. It is a mechanism to prevent other banks from becoming bankrupt due to excessive bad loans. - Statement (iii) is incorrect: This describes a situation that might lead to the creation or use of a bad bank, but it is not the definition of a bad bank itself. - Statement (iv) is correct: This statement accurately describes the primary function of a bad bank – acquiring bad loans and illiquid assets from struggling financial institutions.

  3. The Reserve Bank of India has recently constituted a high-level task force on Public Credit Registry (PCR) to suggest a road map for developing a transparent, comprehensive and near- real-time PCR for India. The task force is headed by

    Asked in: UPSC CDS 1 2018

    1. Sekar Karnam
    2. Vishakha Mulye
    3. Sriram Kalyanaraman
    4. Y. M. Deosthalee
    Show answer

    Answer: D. Y. M. Deosthalee

    The PCR is intended to be a database containing information on all loan contracts in the country, including their history, purpose, and performance. This is expected to help banks and other financial institutions in credit assessment and also improve transparency in the credit market.

  4. The Insolvency and Bankruptcy Board of India (IBBI) was established in the year

    Asked in: UPSC CDS 2 2022

    1. 2014
    2. 2015
    3. 2016
    4. 2017
    Show answer

    Answer: C. 2016

    The Insolvency and Bankruptcy Code, 2016 was a landmark legislation aimed at consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

  5. Consider the following statements regarding Advisory Board for Banking and Financial Frauds (ABBFF). 1. It has been constituted by RBI. 2. It conducts first level examination of all bank fraud cases. 3. It periodically carry out frauds analysis in the financial system and give inputs for any policy formulation related to the frauds. Which of the above statements is/are correct?

    Asked in: GPSC Prelims CSP 2 2024

    1. 1, 3
    2. 2, 3
    3. 3 only
    4. 1, 2, 3
    Show answer

    Answer: B. 2, 3

    - ABBFF is a board set up by the CVC to advise on large value bank frauds. - Its role is advisory and focuses on fraud cases exceeding a specific threshold.

  6. An upsurge has been seen in the NPAs (non- performing assets) of public sector banks recently. Select the correct factors responsible for it. Lower economic growth in the country Aggressive lending by banks in the past, especially during good times Lack of right loan recovery legal provisions Banks switching over to a system based identification of NPAs

    Asked in: GPSC Prelims CSP 2 2019

    1. 1, 2, 3 and 4
    2. 2, 3 and 4 only
    3. 1, 2 and 4 only
    4. 1, 3 and 4 only
    Show answer

    Answer: A. 1, 2, 3 and 4

    Non-Performing Assets (NPAs) in banks are influenced by a combination of macroeconomic factors, bank-specific lending practices, legal and regulatory environment, and reporting standards.

  7. To reduce the Non-Performing Assets, Government of India followed 4R strategy, the 4Rs Indicate __________.

    Asked in: GPSC Prelims CSP 2 2021

    1. Recognition, Resolution, Recapitalisation and Reforms
    2. Refinancing, Reforms, Recapitalisation and Redefining
    3. Recognition, Reporting, Restrictions and Reforms
    4. Recognition, Repurchase, Reforms and Rendering
    Show answer

    Answer: A. Recognition, Resolution, Recapitalisation and Reforms

    - 4R Strategy: Framework to tackle NPAs in Indian banks. - Components: Recognition, Resolution, Recapitalisation, Reforms.

Commercial Banking: Structure, Functions, and Recent Reforms in India

  1. Which of the following with regard to the term 'bank run' is correct?

    Asked in: UPSC CDS 2 2016

    1. The net balance of money a bank has in its chest at the end of the day's business
    2. The ratio of bank's total deposits and total liab‐ ilities
    3. A panic situation when the deposit holders start withdrawing cash from the banks
    4. The period in which a bank creates highest credit in the market
    Show answer

    Answer: C. A panic situation when the deposit holders start withdrawing cash from the banks

    A bank run occurs when a large number of customers withdraw their money from a bank simultaneously because they lose confidence in the bank's solvency and fear they will lose their deposits if the bank fails.

  2. Which one of the following is considered as an agency function of commercial banks in India ?

    Asked in: UPSC CDS 2 2022

    1. Acceptance of deposits
    2. Investment of surplus funds
    3. Acceptance of income tax payments
    4. Providing overdraft facilities
    Show answer

    Answer: C. Acceptance of income tax payments

    - Agency functions of a bank involve acting as an agent or representative for their customers. - This includes services like collecting payments (like taxes, utility bills), paying subscriptions, acting as an executor or trustee, buying and selling securities on behalf of customers, and handling foreign exchange transactions. - Primary banking functions include accepting deposits (creating liabilities for the bank) and providing loans and advances (creating assets for the bank). Investment of surplus funds and providing overdraft facilities fall under these broad categories (asset management and lending).

  3. State Bank of India was established by which of the following Committee's recommendation ?

    Asked in: GPSC Prelims CSP 2 2017

    1. Narasimham Committee
    2. Vidyanathan Committee
    3. M.L. Dantwala Committee
    4. A.D. Gorwala Committee
    Show answer

    Answer: D. A.D. Gorwala Committee

    The Gorwala Committee's recommendations aimed at creating a strong, state-sponsored banking institution with a widespread network to cater to the needs of rural credit.

  4. As per the latest guidelines of RBI for Minor persons to open bank accounts

    Asked in: GPSC Prelims CSP 2 2017

    1. Minor above 10 years can open new bank ac‐ counts only with parents as guardian
    2. Minor above 10 years are permitted to open all types of bank accounts that an adult person can open
    3. Minor above 10 years are permitted to open all type of bank accounts except current account
    4. None of the above
    Show answer

    Answer: B. Minor above 10 years are permitted to open all types of bank accounts that an adult person can open

    RBI permits minors aged 10 years and above to open and operate savings bank accounts in their own name, allowing them transaction freedom, often subject to certain limitations on operations or withdrawals, but independent of a guardian. Current accounts, often used for business transactions and potentially involving overdrafts, are generally restricted for minors due to their limited contractual capacity.

  5. Which of the following statements are correct regarding Regional Rural Banks (RRBs)? 1. They are statutory bodies established under Regional Rural Bank Act, 1976 2. The first Regional Rural Bank "Prathama Grameen Bank" was set up on 2nd October, 1975 3. RRBs must follow priority sector lending norms at par with the commercial bank

    Asked in: GPSC Prelims CSP 2 2019

    1. 1 and 3 only
    2. 2 and 3 only
    3. 1 and 2 only
    4. 1, 2 and 3
    Show answer

    Answer: C. 1 and 2 only

    - RRBs were established to cater to the credit needs of rural and agricultural sectors. - They are jointly owned by the Central Government, State Government, and a Sponsor Bank. - RRBs have a specific focus on financial inclusion in rural areas.

  6. The basic aim of Lead Bank Scheme is that ____________.

    Asked in: GPSC Prelims CSP 2 2019

    1. Big banks should adopt particular district for intensive development
    2. Individual banks should adopt particular district for intensive development
    3. There should be stiff competition among the various nationalized banks
    4. All the banks should make intensive efforts to mobilize deposits
    Show answer

    Answer: A. Big banks should adopt particular district for intensive development

    The Lead Bank Scheme is a framework for assigning specific banks lead roles in designated districts to coordinate development efforts and banking penetration.

  7. Which of the following Chinese bank got permission to offer regular services in India from RBI?

    Asked in: GPSC Prelims CSP 2 2019

    1. Bank of Mandarin
    2. Bank of Sichuan
    3. Bank of China
    4. We Bank of Schengen
    Show answer

    Answer: C. Bank of China

    This was a significant development allowing one of China's major state-owned commercial banks to establish a presence and offer regular banking services in India.

Cooperative Banks and Development Financial Institutions (DFIs)

  1. Which one of the following is not a source of direct finance?

    Asked in: BPSC Prelims Exam 65th

    1. NABARD
    2. Regional Rural Bank
    3. State Bank of India
    4. Allahabad Bank
    Show answer

    Answer: A. NABARD

  2. Recently the Reserve Bank of India has imposed limitations, initially for a period of six months, on the withdrawal of amount by account holders of which one of the following banks?

    Asked in: UPSC CDS 1 2020

    1. IndusInd Bank
    2. Dhanlaxmi Bank
    3. Punjab and Maharashtra Cooperative Bank
    4. South Indian Bank
    Show answer

    Answer: C. Punjab and Maharashtra Cooperative Bank

    In late September 2019, RBI placed PMC Bank under restrictions, including caps on customer withdrawals, due to alleged financial irregularities, including under-reporting of non-performing assets.

  3. Which one of the following is not a fund managed by NIIFL (National Investment and Infrastructure Fund Limited) ?

    Asked in: UPSC CDS 2 2024

    1. Master Fund
    2. Fund of Funds
    3. Strategic Opportunities Fund
    4. Global Investment Fund
    Show answer

    Answer: D. Global Investment Fund

    NIIFL manages various sector-specific and strategy-specific funds to channel investment into Indian infrastructure and related sectors.

  4. Select the Financial Institution / Institutions currently regulated by the RBI from the list given below. (A) EXIM Bank (Export Import Bank) (B) NHB (National Housing Bank) (C) NABARD (National Bank for Agriculture and Rural Development) (D) All of the above

    Asked in: GPSC Prelims CSP 2 2017

    1. EXIM Bank (Export Import Bank)
    2. NHB (National Housing Bank)
    3. NABARD (National Bank for Agriculture and Rural Development)
    4. All of the above
    Show answer

    Answer: D. All of the above

    RBI regulates and supervises various financial institutions in India, including All India Financial Institutions (AIFIs) like EXIM Bank, NHB, and NABARD, under specific provisions of the RBI Act and other relevant statutes.

  5. Which of the following statements is/are correct? MUDRA stands for Micro Units Development and Refinance Agency Limited MUDRA has three schemes Shishu, Kishor and Tarun Mudra Scheme can fund heavy and big industries also MUDRA loans include business installment loan, commercial vehicle loan etc.

    Asked in: GPSC Prelims CSP 2 2019

    1. 1 and 2 only
    2. 1, 2 and 3 only
    3. 1, 2 and 4 only
    4. 1, 2, 3 and 4
    Show answer

    Answer: C. 1, 2 and 4 only

    - MUDRA is a refinancing agency for banks and MFIs lending to micro-enterprises. - It focuses on the non-corporate, non-farm micro-enterprise sector. - The three categories (Shishu, Kishor, Tarun) reflect the stage of growth and funding needs of the micro-unit.

  6. During which of the following summit BRICS Development Bank was launched ?

    Asked in: KPSC KAS Prelims 2014

    1. Russia
    2. South Africa
    3. China
    4. Brazil
    Show answer

    Answer: D. Brazil

    The New Development Bank (NDB), commonly known as the BRICS Development Bank, was established by the BRICS member states (Brazil, Russia, India, China, and South Africa). The agreement to establish the NDB was a key outcome of a specific BRICS summit.

  7. Arrange the following development finance institutions according to the order in which they were established : a. Industrial Development Bank of India, IDBI b. Industrial Investment Bank of India, IIBI c. Industrial Credit and Investment Corporation of India, ICICI d. Industrial Finance Corporation of India, IFCI

    Asked in: MPSC CS Prelims 2016

    1. d, a, b, c
    2. d, c, b, a
    3. d, c, a, b
    4. d, b, a, c
    Show answer

    Answer: C. d, c, a, b

    - DFIs were established in India to provide long- term finance for industrial development. - Knowing the founding dates of key financial institutions is important for understanding India's economic history.

Deposit Insurance and Credit Guarantee Corporation (DICGC)

  1. Consider the following statements: A rupee Vostro account is an account that an Indian bank holds for a foreign bank in the domestic currency (rupee) to enable domestic banks to provide international banking services. Insurance density, i.e., average insurance premium per capita does not fully capture the financing gap in the event of a premature death because most of the insurance products sold in India are savings-linked with a small component of protection. Which of the statements given above is/are correct ?

    Asked in: UPSC CDS 2 2024

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: C. Both 1 and 2

    - A Rupee Vostro account is an INR account held by an Indian bank for a foreign bank. - Insurance density calculation may not fully reflect the adequacy of life cover due to the nature of policies sold in India (savings-linked).

  2. What is the maximum deposit amount per annum under Sukanya Samriddhi Account ?

    Asked in: TOURIST INFORMATION OFFICER(TIO) 2017

    1. 5 Lakh 50 Thousand Rupees
    2. 1 Lakh 50 Thousand Rupees
    3. 1 Lakh
    4. 2 Lakh 50 Thousand Rupees
    Show answer

    Answer: B. 1 Lakh 50 Thousand Rupees

    The annual deposit limit for Sukanya Samriddhi Account is ₹1.5 Lakh.

Financial Inclusion: Strategies, Schemes (e.g., PMJDY), and Digitalization

  1. Which committee has been constituted by the Government of India to boost cashless transaction ?

    Asked in: BPSC Prelims Exam 60 62rd

    1. Nachiket More Committee
    2. Shanta Kumar Committee
    3. H.R. Khan Committee
    4. Neeraj Kumar Gupta Committee
    Show answer

    Answer: D. Neeraj Kumar Gupta Committee

    The Nachiket More Committee on Comprehensive Financial Services for Small Businesses and Low- Income Households was constituted by the RBI in

  2. Its recommendations included promoting digital payments and financial inclusion, which are crucial for boosting cashless transactions. 179. How much loan amount will be granted by bank under “Pradhan Mantri Mudra Yojana” for industry, business and service under “Kishor enterprise” ?

    Asked in: CGPSC Prelims Exam 2017

    1. ₹ 50,000
    2. More than ₹ 50,000 and upto ₹ 1,00,000
    3. More than ₹ 1,00,000 and upto ₹ 5,00,000
    4. More than ₹ 50,000 and upto ₹ 5,00,000
    Show answer

    Answer: D. More than ₹ 50,000 and upto ₹ 5,00,000

    - PMMY aims to provide loans up to ₹10 lakh to non-corporate, non-farm small/micro enterprises. - The three categories are Shishu (up to ₹50,000), Kishor (above ₹50,000 and up to ₹5,00,000), and Tarun (above ₹5,00,000 and up to ₹10,00,000).

  3. What is the maximum limit of loan at present, provided under the Prime Minister Mudra Yojana ?

    Asked in: CGPSC Prelims Exam 2024

    1. Rupees 10 Lakh
    2. Rupees 15 Lakh
    3. Rupees 20 Lakh
    4. Rupees 25 Lakh
    Show answer

    Answer: A. Rupees 10 Lakh

    cgpsc 2025-2025 - PM Mudra Yojana was launched in 2015 to provide loans to non-corporate, non-farm micro and small enterprises. - The loans are provided through Member Lending Institutions (MLIs) like Banks, NBFCs, MFIs, etc. - The scheme offers loans up to ₹10 lakh under three categories: - Shishu: Up to ₹50,000 - Kishore: Above ₹50,000 and up to ₹5 lakh - Tarun: Above ₹5 lakh and up to ₹10 lakh

  4. According to Statista, what is India's rank in the number of fintech unicorns worldwide?

    Asked in: GPSC Prelims CSP 2 2024

    1. Third
    2. Second
    3. First
    4. Fourth
    Show answer

    Answer: A. Third

    According to data and reports from Statista, India is ranked as the third country globally in terms of the number of fintech unicorns. The United States typically holds the top position, followed by the United Kingdom, with India coming in third.

  5. Which of the following come under the classification of small savings schemes in India? 1. Postal deposits comprising savings account, recurring deposits, time deposits of varying maturities and monthly income schemes 2. Savings certificates comprising the national small savings certificates and Kisan Vikas Patra 3. Social Security Schemes comprising the public provident fund and senior citizens savings scheme

    Asked in: GPSC Prelims CSP 2 2019

    1. 1 and 2 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: D. 1, 2 and 3

    Small savings schemes in India comprise various instruments managed by the government, primarily through post offices and banks, aimed at mobilizing savings from individuals, especially small savers.

  6. Regarding India Post Payments Bank (IPPB), which of the following statements is/are correct? IPPB was established in 2016.

    Asked in: HAS Prelims 2021

    1. 1, 2 and 3 only
    2. 2, 3 and 4 only
    3. 1, 2 and 4 only
    4. 1, 3 and 4 only
    Show answer

    Answer: C. 1, 2 and 4 only

    It has been incorporated as a public limited company with 100 percent GOI equity under the Department of Post. The main objective is to promote digital payments and remittances, while IPPB mainly focuses on savings. Services launched by IPPB include life and general insurance, digital life certificate, domestic money transfer. - Statement 1 is correct: IPPB was incorporated as a public limited company under the Department of Post in 2016. It received the final Reserve Bank of India (RBI) license in January 2017 and commenced operations in April 2018. So, it was established/incorporated in 2016. - Statement 2 is correct: IPPB has been incorporated as a public limited company under the Companies Act, 2013, with 100 percent equity held by the Government of India, functioning under the Department of Post (Ministry of Communications). - Statement 3 is incorrect: The main objective of IPPB is to provide accessible, affordable, and trusted banking and payment solutions. While it promotes digital payments, remittances, and offers savings accounts, stating that it "mainly focuses on savings" is too narrow and potentially misleading. It's a payment bank, primarily facilitating payments and transfers, although savings are also a core offering. - Statement 4 is correct: IPPB leverages the vast postal network to offer various services including opening savings/current accounts, money transfer (DMT), bill payments, recharge, and facilitating third-party services like life and general insurance (as a corporate agent) and Digital Life Certificate (Jeevan Pramaan).

  7. In 2014, the Government implemented which of the following Scheme for financial inclusion ?

    Asked in: MPSC CS Prelims 2023

    1. Demonetization Scheme
    2. Property Disclosure Scheme
    3. Pradhan Mantri Jan Dhan Yojana
    4. All of the above
    Show answer

    Answer: C. Pradhan Mantri Jan Dhan Yojana

    PMJDY aimed to provide universal access to banking facilities, including a basic savings bank account, access to credit, insurance, and pension schemes, for all households across the country. It focused on reaching the unbanked population, particularly in rural areas, by opening zero-balance accounts.

Financial Markets: Money Market and Capital Market (Components, Instruments, Role)

  1. A sum of money invested at compound interest amounts to ¥ 4,624 in 2 years and to ¥ 4,913 in 3 years. The sum of money is

    Asked in: BPSC Prelims Exam 63rd

    1. ¥ 4,240
    2. ¥ 4,280
    3. ¥ 4,096
    4. ¥ 4,346
    Show answer

    Answer: C. ¥ 4,096

    - Let P be the principal sum and R be the rate of compound interest per annum. - Amount after 2 years (A₂) = P(1 + R/100)² = ¥ 4,624. - Amount after 3 years (A₃) = P(1 + R/100)³ = ¥ 4,913. - The interest earned in the 3rd year is A₃ - A₂ = ¥ 4,913 - ¥ 4,624 = ¥ 289. - This interest is earned on the amount at the end of the 2nd year (A₂). So, ¥ 289 is the simple interest on ¥ 4,624 for one year at rate R. - R = (Interest / Principal for that year) 100 = (289 / 4624) 100. - 289 is 17². Let's check if 4624 is divisible by 289 or 17. 4624 / 17 = 272. 272 / 17 =

  2. So, 4624 = 16 17 17 = 16 289. - R = (289 / (16 289)) 100 = (1/16) 100 = 6.25%. - Now, use the amount after 2 years: P(1 + R/100)² = 4624. - P(1 + 6.25/100)² = 4624. - P(1 + 1/16)² = 4624. - P(17/16)² = 4624. - P(289/256) = 4624. - P = 4624 (256/289). - Since 4624 = 16 289, P = (16 289) (256/289) = 16 256. - 16 256 = 16 (16 16) = 16³ = 4096. - The sum of money is ¥ 4,096. 207. A man buys ¥ 20 shares paying 9% dividend. The man wants to have an interest of 12% on his money. The market value of each share is

    Asked in: BPSC Prelims Exam 63rd

    1. ¥ 18
    2. ¥ 15
    3. ¥ 21
    4. ¥ 25
    Show answer

    Answer: B. ¥ 15

    - Face Value (FV) of each share = ¥ 20. - Dividend Rate = 9%. - Annual Dividend per share = 9% of wants to earn an interest of 12% on the money he invests (the market value of the share). - Let the Market Value (MV) of each share be ¥ x. - The dividend received per share (¥ 1.80) should represent 12% of the market value (¥ x). - So, 12% of x = numerator and denominator by 100: x = 180 / 12. - x = 15. - The market value of each share is ¥ 15.

  3. A invested ¥ 76,000 in a business. After few months, B joined him with ¥ 57,000. At the end of the year, the total profit was divided between them in the ratio 2:1. After how many months did B join?

    Asked in: BPSC Prelims Exam 63rd

    1. 4
    2. 4
    3. 3
    4. 8
    Show answer

    Answer: A. 4

    - A invested ¥ 76,000. A's investment was for the full year, i.e., 12 months. - B invested ¥ 57,000. Let B have joined after 'x' months. This means B's investment was for (12 - x) months. - In a partnership, the profit is divided in the ratio of the product of the investment and the time period for which the investment was made. - Ratio of profits (A : B) = (A's Investment A's Time) : (B's Investment B's Time). - The given profit ratio is 2:1. - So, (76,000 12) : (57,000 (12 - x)) = 2 : 1. - We can simplify the investment amounts by dividing by 1000: (76 12) : (57 (12 - x)) = 2 : 1. - The ratio can be written as a fraction: (76 12) / (57 (12 - x)) = 2/1. - We can simplify 76 and 57. Both are divisible by 19. 76 = 19 4, and 57 = 19 3. - (4 19 12) / (3 19 (12 - x)) = 2. - Cancel out 19: (4 12) / (3 (12 - x)) = 2. - Simplify 12 and 3: (4 4) / (12 - x) = 2. - 16 / (12 - x) = 2. - 16 = 2 (12 - x). - 8 = 12 - x. - x = 12 - 8 = 4. - B joined after 4 months.

  4. The Government of India announced a new scheme 'NIRVIK' for 2020-21 for which of the following sectors of economy will take the benefit from this scheme?

    Asked in: BPSC Prelims Exam 66th

    1. Agriculture sector
    2. Industrial sector
    3. Health sector
    4. Export sector
    Show answer

    Answer: D. Export sector

    The scheme aims to provide higher insurance cover and reduced premiums for small exporters, thereby increasing the availability of credit and mitigating risks for exporters.

  5. Which one of the following terms is used in Economics to denote a technique for avoiding a risk by making a counteracting transaction ?

    Asked in: UPSC CDS 1 2016

    1. Dumping
    2. Hedging
    3. Discounting
    4. Deflating
    Show answer

    Answer: B. Hedging

    Hedging is an investment strategy used to offset potential losses or gains that may be incurred by a companion investment. It involves taking an opposite position in a related asset or derivative. The term describes a technique for avoiding a risk (like price fluctuations) by making a counteracting transaction to protect against that risk. Dumping refers to selling goods at an unfairly low price. Discounting relates to calculating present value or deducting interest. Deflating is a reduction in the general price level.

  6. Which one of the following statements about Exchange-Traded Fund (ETF) is not correct?

    Asked in: UPSC CDS 1 2018

    1. It is a marketable security.
    2. It experiences price changes throughout the day.
    3. It typically has lower daily liquidity and higher fees than mutual fund shares.
    4. An ETF does not have its net asset value cal‐ culated once at the end of every day.
    Show answer

    Answer: C. It typically has lower daily liquidity and higher fees than mutual fund shares.

    Exchange-Traded Funds (ETFs) are designed to be highly liquid and are known for their low expense ratios (fees) compared to many traditional mutual funds, especially actively managed ones. ETFs trade on stock exchanges throughout the day, providing intra-day liquidity, unlike mutual funds whose trades are settled only once per day at the Net Asset Value (NAV). Therefore, the statement that ETFs typically have lower daily liquidity and higher fees than mutual fund shares is incorrect.

  7. Which one of the following events is not correctly matched with the year in which it happened?

    Asked in: UPSC CDS 1 2018

    1. Inauguration of the SWIFT system of electron‐ ic interbank fund transfers worldwide—1985
    2. Conclusion of the Uruguay Round of GATT— 1994
    3. Inauguration of the World Trade Organization —1995
    4. Establishment of the first wholly electronic stock exchange (Nasdaq)—1971
    Show answer

    Answer: A. Inauguration of the SWIFT system of electron‐ ic interbank fund transfers worldwide—1985

    SWIFT (Society for Worldwide Interbank Financial Telecommunication) was founded in 1973, and its messaging services became operational in 1977. Therefore, 1985 is incorrect for its inauguration or becoming operational.

Inflation: Types, Causes, Effects, and Monetary Policy Responses

  1. Which one of the following indices is now used by the Reserve Bank of India to measure the rate of Inflation in India?

    Asked in: UPSC CDS 1 2017

    1. NASDAQ Index
    2. BSE Index
    3. Consumer Price Index
    4. Wholesale Price Index
    Show answer

    Answer: C. Consumer Price Index

    Historically, the Wholesale Price Index (WPI) was the primary measure of inflation in India. However, WPI captures price changes at the wholesale level and does not reflect the prices paid by consumers. Following recommendations by committees and a shift in focus towards consumer inflation globally, the RBI officially adopted CPI-Combined as its main inflation target measure around 2014-2015.

  2. Which one of the following situations can lead to inflation?

    Asked in: UPSC CDS 1 2023

    1. Rapid growth of aggregate demand outweighing supply
    2. Sluggish growth of aggregate demand
    3. Reduction in the money supply
    4. Higher levels of unemployment
    Show answer

    Answer: A. Rapid growth of aggregate demand outweighing supply

    - Inflation can be caused by factors affecting demand (demand-pull inflation) or factors affecting supply (cost-push inflation). - Rapid growth of aggregate demand relative to supply creates upward pressure on prices. - Sluggish demand growth typically leads to disinflation or deflation. - Reduction in money supply is a monetary policy tool usually used to combat inflation by reducing aggregate demand. - Higher levels of unemployment are usually associated with slack in the economy and low demand, which reduces inflationary pressure.

  3. Which of the following statements is/are correct? A price index captures the change in the average price of a constant basket of commodities. If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively. Select the correct answer using the code given below.

    Asked in: UPSC CDS 1 2024

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: A. 1 only

    - Statement 1 is correct. A price index (like the Consumer Price Index or CPI) is typically constructed to measure the average change over time in the prices of a constant basket of consumer goods and services. While the GDP deflator uses a changing basket, the statement refers to "a price index," and indices using a constant basket are fundamental examples. - Statement 2 is incorrect. The inflation rate in a given year is the percentage change in the price index compared to the previous year. - Inflation rate in the 2nd year = [(Index in Year 2 - Index in Year 1) / Index in Year 1] 100 = [(110 - 100) / 100] 100 = 10%. This part is correct. - Inflation rate in the 3rd year = [(Index in Year 3 - Index in Year 2) / Index in Year 2] 100 = [(121 - 110) / 110] 100 = (11 / 110) 100 = 10%. The statement says 21%, which is incorrect. The 21% represents the cumulative increase from Year 1 to Year 3.

  4. Which of the following will be the outcome if an economy is under the inflationary pressure? 1. Domestic currency heads for depreciation. 2. Exports become less competitive with imports getting costlier. 3. Cost of borrowing decreases. 4. Bondholders get benefitted. Select the correct answer using the code given below.

    Asked in: UPSC CDS 2 2016

    1. 1 and 2
    2. 2 and 3
    3. 1 and 3 only
    4. 1, 3 and 4
    Show answer

    Answer: A. 1 and 2

    Inflation reduces the purchasing power of a currency. If a country experiences higher inflation relative to its trading partners, its goods become more expensive for foreigners, reducing the competitiveness of exports. This higher domestic price level and reduced export competitiveness often lead to a decrease in demand for the domestic currency on the international market, potentially causing it to depreciate.

  5. The Wholesale Price Inflation has increased in India during 2021 – 2022 due to which of the following factors ? 1. Sharp increase in international prices of crude oil 2. Decrease in economic activity post-Covid 3. Disruption of global supply chain 4. High freight cost Select the correct answer using the code given below :

    Asked in: UPSC CDS 2 2023

    1. 2 and 3 only
    2. 1, 3 and 4
    3. 1 and 2 only
    4. 1 and 4 only
    Show answer

    Answer: B. 1, 3 and 4

  6. Sharp increase in international prices of crude oil: Correct. Global energy prices, especially crude oil, saw a significant surge in 2021-2022 due to recovering demand post-pandemic and later amplified by geopolitical tensions (like the Russia- Ukraine conflict which intensified in early 2022). Since crude oil and petroleum products have a high weight in the WPI index and affect costs across various sectors (transportation, manufacturing inputs), this was a major driver of inflation. 2. Decrease in economic activity post-Covid: Incorrect. Economic activity in India was recovering significantly in 2021-2022 from the depths of the pandemic-induced slowdown. Increased economic activity typically contributes to demand-side inflation, though WPI is more cost-driven. A decrease in activity would likely dampen inflation. 3. Disruption of global supply chain: Correct. The COVID-19 pandemic caused widespread disruptions in global supply chains, leading to shortages of components and finished goods. This mismatch between supply and demand pushed up input costs for producers, directly contributing to higher WPI. 4. High freight cost: Correct. Global shipping and due to supply chain bottlenecks, port congestion, and increased fuel prices. Higher freight costs translate into higher landed costs for imported goods and higher transportation costs for domestic movement, adding to WPI. 335. Due to inflation

    Asked in: logistics costs increased substantially in 2021 2022 · CGPSC Prelims Exam 2013

    1. Prices of goods increase
    2. The value of money falls
    3. The exchange rate improves
    4. Above (A) and (B)
    Show answer

    Answer: D. Above (A) and (B)

    Inflation leads to a rise in the general price level and a decrease in the purchasing power (value) of money.

  7. Which of the following lead to Demand-Pull Inflation? 1. A growing economy 2. Increase in Forex reserves 3. Deficit financing by the government 4. Depreciation of rupee Select the correct answer code:

    Asked in: GPSC Prelims CSP 2 2024

    1. 1, 2, 3, 4
    2. 1, 3, 4
    3. 2, 3
    4. 1, 2, 3
    Show answer

    Answer: A. 1, 2, 3, 4

    - Demand-pull inflation is caused by increases in aggregate demand relative to aggregate supply. - Factors that increase consumer spending, government spending, investment, or net exports can contribute to demand-pull inflation.

Monetary Policy Committee (MPC): Structure, Mandate, and Functioning

  1. The Monetary Policy of India is formulated by

    Asked in: APSC CCE Prelims Exam 2014

    1. the Reserve Bank of India
    2. the National Development Council
    3. the Planning Commission of India
    4. the Ministry of Finance
    Show answer

    Answer: A. the Reserve Bank of India

    Monetary policy involves managing interest rates and credit conditions to influence inflation, consumption, growth, and liquidity in the economy. This is the primary function of the central bank.

  2. An empowered six-member Monetary Policy Committee (MPC) was constituted by the Central Government w.e.f. 5 Oct 2020. The quorum for the meeting of the MPC is 1. Two Members 2. Three Members 3. Four Members 4. Five Members

    Asked in: GPSC Prelims CSP 2 2023

    1. 1
    2. 3
    3. 2
    4. 4
    Show answer

    Answer: B. 3

    The Monetary Policy Committee (MPC) was constituted by the Central Government under Section 45ZB of the Reserve Bank of India Act, 1934. It is a six-member body comprising three members from the Reserve Bank of India (including the Governor as ex officio Chairperson) and three members appointed by the Central Government. According to Section 45ZC of the RBI Act, the quorum for the meeting of the Monetary Policy Committee shall be four members. Decisions are taken by a majority vote of the members present and voting.

  3. Which of the following is incorrect about the RBI Governor?

    Asked in: PPSC CS Prelims 2018

    1. He is part of the search cum selection commit‐ tee for members of Monetary Policy Committee (MPC).
    2. He heads the MPC.
    3. He represents India in WTO conference.
    4. He has the casting vote in MPC.
    Show answer

    Answer: C. He represents India in WTO conference.

    - RBI Governor is part of the MPC selection process. - RBI Governor chairs the MPC. - RBI Governor has a casting vote in MPC. - RBI Governor does not typically represent India at WTO conferences.

  4. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) ? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. Select the correct answer using the code given below :

    Asked in: UPSC IAS 2017

    1. 1 only
    2. 1 and 2 only
    3. 3 only
    4. 2 and 3 only
    Show answer

    Answer: A. 1 only

    The Monetary Policy Committee (MPC) was established to fix the benchmark policy interest rate (repo rate) to achieve the inflation target set by the government.

  5. Which of the following is the highest policy- making body for monetary matters in India?

    Asked in: UPSC Combined Section Officer 2019 20

    1. The Securities and Exchange Board of India
    2. The NITI Aayog
    3. The Ministry of Finance
    4. The Reserve Bank of India
    Show answer

    Answer: D. The Reserve Bank of India

    - RBI is the monetary authority of India. - The Monetary Policy Committee (MPC) within RBI decides the key interest rates. - SEBI regulates capital markets, NITI Aayog is a planning/advisory body, and the Ministry of Finance handles fiscal policy.

  6. RBI's Monetary Policy Committee in its meeting held from 7 April to 9 April, 2025 decided......................to reduce repo rate to...................... (1) by majority votes, 6 percent (2) unanimously, 6 percent (3) by majority votes, 7 percent (4) unanimously, 7 percent (5) Question not attempted

    Asked in: Research Assistant (Evaluation Dept.) 2024

    1. by majority votes, 6 percent
    2. unanimously, 6 percent
    3. by majority votes, 7 percent
    4. unanimously, 7 percent
    Show answer

    Answer: A. by majority votes, 6 percent

    The Monetary Policy Committee (MPC) of the RBI decides on the policy repo rate. Decisions are made by a majority vote of the members present and voting. The repo rate is a crucial tool for managing inflation and economic growth.

  7. Who formulates the Monetary Policy of India?

    Asked in: GS&GE JE PWD 10 2024 1601 2025

    1. The Governor of RBI
    2. The Finance Minister, Government of India
    3. The Monetary Policy Committee of RBI
    4. The NITI Aayog of India
    Show answer

    Answer: C. The Monetary Policy Committee of RBI

    The formulation of monetary policy in India is a collective decision-making process by the Monetary Policy Committee (MPC) of the RBI, not solely by the Governor. This committee structure was established to bring more transparency and accountability to monetary policy decisions.

Monetary Policy: Objectives, Instruments (quantitative and qualitative), and Transmission Mechanism

  1. Bank rate means :

    Asked in: BPSC Prelims Exam 60 62rd

    1. Interest rate charged by moneylenders
    2. Interest rate charged by Scheduled Banks
    3. Rate of profit of banking institution
    4. Official rate of interest charged by Central Bank
    Show answer

    Answer: D. Official rate of interest charged by Central Bank

    Bank rate is the official interest rate set by the Central Bank for lending to commercial banks without collateral.

  2. Which one of the following is not correct about Repo rate?

    Asked in: UPSC CDS 1 2020

    1. It is the interest rate charged by the Central Bank on overnight loan.
    2. It is the interest rate paid by the commercial banks on overnight borrowing.
    3. It is the interest rate agreed upon in the loan contract between a commercial bank and the Central Bank.
    4. It is the cost of collateral security.
    Show answer

    Answer: D. It is the cost of collateral security.

    - Repo rate is a key monetary policy tool used by the RBI. - It stands for Repurchase Rate. In a repo transaction, banks sell securities to RBI with an agreement to repurchase them at a later date at a pre-determined price (which includes the interest component). - The repo rate influences borrowing costs for banks and thereby affects liquidity in the financial system.

  3. The Cash Reserve Ratio refers to

    Asked in: UPSC CDS 1 2020

    1. the share of Net Demand and Time Liabilities that banks have to hold as liquid assets
    2. the share of Net Demand and Time Liabilities that banks have to hold as balances with the RBI
    3. the share of Net Demand and Time Liabilities that banks have to hold as part of their cash re‐ serves
    4. the ratio of cash holding to reserves of banks
    Show answer

    Answer: B. the share of Net Demand and Time Liabilities that banks have to hold as balances with the RBI

    - CRR is a monetary policy tool used by the RBI to control liquidity in the banking system. - Banks do not earn any interest on the balances held with the RBI under CRR. - It is a percentage of the bank's total deposits (NDTL).

  4. Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?

    Asked in: UPSC CDS 1 2023

    1. Expansionary fiscal and monetary policy
    2. Contractionary fiscal and monetary policy
    3. Contractionary fiscal policy and expansionary monetary policy
    4. Contractionary monetary policy and expan‐ sionary fiscal policy
    Show answer

    Answer: D. Contractionary monetary policy and expan‐ sionary fiscal policy

    - Monetary policy directly influences interest rates and money supply. Contractionary monetary policy raises interest rates. - Fiscal policy influences aggregate demand through government spending and taxation. Expansionary fiscal policy increases demand. - In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation. - Contractionary monetary policy is the most unambiguous tool to raise interest rates. Combined with expansionary fiscal policy, which also puts upward pressure on rates (via crowding out and demand), it creates a strong force for higher interest rates and currency appreciation.

  5. Which of the following indicators is/are used to observe the monetary transmission mechanism in the economy? 1. Weighted average lending rate 2. Weighted average domestic term deposit rate 3. 1-year median MCLR 4. SDF rate Select the correct answer using the code given below.

    Asked in: UPSC CDS 1 2024

    1. 1 and 2 only
    2. 1, 2 and 3
    3. 3 and 4
    4. 4 only
    Show answer

    Answer: B. 1, 2 and 3

    WALR, WADTDR, and MCLR are standard indicators used to assess the pass-through of monetary policy changes to bank interest rates in India.

  6. Consider the following statements regarding instruments of monetary policy: 1. Standing deposit facility (SDF) rate was introduced in April 2022. 2. SDF rate replaced fixed reverse repo rate as the floor of the LAF corridor. Which of the statements given above is/are correct?

    Asked in: UPSC CDS 1 2024

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: C. Both 1 and 2

    SDF was introduced in April 2022 and functions as the floor of the LAF corridor, replacing the fixed reverse repo rate.

  7. The monetary policy in India uses which of the following tools? 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Select the correct answer using the code given below.

    Asked in: UPSC CDS 2 2017

    1. 1 and 2 only
    2. 2 and 3 only
    3. 1 and 4 only
    4. 1, 2, 3 and 4
    Show answer

    Answer: A. 1 and 2 only

    Monetary policy aims to control the money supply, credit conditions, and interest rates to achieve macroeconomic objectives. Public debt and public revenue are instruments of fiscal policy, which is handled by the government.

Money: Functions, Forms, and Measures of Money Supply

  1. Which of the following are included in M1 definition of money for the Indian economy? 1. Reserves 2. Currency 3. Time deposits 4. Demand deposits Select the correct answer using the code given below.

    Asked in: UPSC CDS 1 2024

    1. 1 and 3 only
    2. 2 and 3
    3. 2 and 4
    4. 1, 3 and 4
    Show answer

    Answer: C. 2 and 4

    - In India, the Reserve Bank of India (RBI) defines different measures of money supply (M0, M1, M2, M3, M4). - The definition of M1 is: M1 = Currency with the Public + Demand Deposits with the Banking System + 'Other' Deposits with the RBI. - Based on this definition: - 1. Reserves: These refer to cash reserves held by commercial banks with the RBI. They are part of the monetary base (M0), not M1. M1 is the money supply held by the non-bank public. - 2. Currency: Currency notes and coins held by the public are a component of M1. - 3. Time deposits: These include fixed deposits and recurring deposits. They are less liquid than demand deposits and are included in broader measures of money supply like M2, M3, and M4, but not M1. - 4. Demand deposits: These are deposits held in current and savings accounts that can be withdrawn on demand (e.g., through cheques or ATM withdrawals). They are a component of M1. - Therefore, currency and demand deposits are included in the M1 definition of money for the Indian economy.

  2. Which one of the following forms of money supply is considered as the most widely used in the Indian monetary system ?

    Asked in: UPSC CDS 2 2022

    1. M1
    2. M2
    3. M3
    4. M4
    Show answer

    Answer: C. M3

    - The Reserve Bank of India (RBI) tracks several measures of money supply: M1, M2, M3, and M4. - M1 is narrow money (most liquid assets). M3 is broad money. - M3 includes M1 plus net time deposits of commercial banks. It is considered a better indicator of the overall liquidity in the economy and is the measure most commonly used by the RBI for monetary policy purposes.

  3. The terms 'Ethereum, Solana, Polkadot and Tether', sometimes mentioned in the news, refer to

    Asked in: UPSC CDS 2 2022

    1. Cryptocurrencies
    2. Earth Observation Satellites
    3. Hypersonic Cruise Missiles
    4. Virtual Private Network service providers
    Show answer

    Answer: A. Cryptocurrencies

    Cryptocurrencies are digital or virtual currencies that are secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

  4. Which of the following are included in the definition of Narrow Money ? 1. Currency with the public 2. Demand deposits 3. 'Other' deposits with Reserve Bank of India 4. Banker's deposits with Reserve Bank of India Select the correct answer using the code given below :

    Asked in: UPSC CDS 2 2023

    1. 1, 2 and 4
    2. 1 and 2 only
    3. 1, 2 and 3
    4. 3 and 4 only
    Show answer

    Answer: C. 1, 2 and 3

  5. Currency with the public Notes and coins held by the public. 2. Demand deposits Deposits held by the public with commercial banks and co-operative banks that are withdrawable on demand (e.g., savings accounts, current accounts). 3. 'Other' deposits with Reserve Bank of India Demand deposits with RBI of entities other than banks and the government (e.g., deposits of quasi-government institutions, international financial institutions like IMF). 4. Banker's deposits with Reserve Bank of India Deposits of commercial banks with the RBI, which form a part of the reserves maintained by banks. These are included in the definition of M0 (Reserve Money) but not M1 in the standard Indian monetary aggregates. 532. What would be the impact on the economy if people start holding more currency in hand and less in deposits ?

    Asked in: UPSC CDS 2 2023

    1. Money demand will increase
    2. Money multiplier will decrease
    3. Money multiplier will increase
    4. Money demand will decrease
    Show answer

    Answer: B. Money multiplier will decrease

    When people hold more currency in hand and less in deposits, the currency-deposit ratio increases. The money multiplier, which determines the total money supply in the economy based on the monetary base, is inversely related to the currency-deposit ratio. Specifically, the simple money multiplier formula is (1+c)/(c+r), where c is the currency- deposit ratio and r is the reserve-deposit ratio. An increase in 'c' directly reduces the value of the money multiplier.

  6. The term 'paper gold' refers to :

    Asked in: CGPSC Prelims Exam 2020

    1. Special Drawing Rights (SDR) of IMF
    2. Special Accommodation Rights
    3. Currencies pegged to gold
    4. None of the above
    Show answer

    Answer: A. Special Drawing Rights (SDR) of IMF

    - SDRs were created by the IMF in 1969. - Their value is based on a basket of five major international currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound. - SDRs represent a potential claim on the freely usable currencies of IMF members.

  7. If the simple interest on a certain amount for 2 years is Rs. 60 and the compound interest for the same amount for 2 years is Rs. 63.75. What will be that amount ?

    Asked in: GPSC Prelims CSP 1 2017

    1. Rs. 180
    2. Rs. 240
    3. Rs. 300
    4. Rs. 360
    Show answer

    Answer: B. Rs. 240

    - The difference between CI and SI for 2 years is the interest on the first year's SI. - SI for 1 year is constant and is P R / 100. - CI for the first year is equal to SI for the first year.

Non-Banking Financial Companies (NBFCs): Types, Regulation, and Significance

  1. Which one of the following statements about a borrower from a Microfinance Company is not correct ?

    Asked in: UPSC CDS 2 2022

    1. The borrower should not have annual income beyond a limit.
    2. The borrower should not seek loan amount beyond a limit.
    3. The borrower should not refuse to offer a col‐ lateral.
    4. The borrower should not refuse to pay any rate of interest offered.
    Show answer

    Answer: C. The borrower should not refuse to offer a col‐ lateral.

    Microfinance typically serves low-income individuals and does not require traditional collateral from borrowers.

  2. Which one of the following statements about Non-Banking Financial Companies (NBFCs) is not correct ?

    Asked in: UPSC CDS 2 2022

    1. NBFCs cannot accept demand deposits.
    2. NBFCs cannot give loans.
    3. NBFCs cannot issue cheques drawn on them‐ selves.
    4. NBFCs cannot offer deposit insurance facility of Deposit Insurance and Credit Guarantee Cor‐ poration.
    Show answer

    Answer: B. NBFCs cannot give loans.

    NBFCs are financial institutions whose main functions include lending and investment.

  3. Consider the following statements regarding “Neo Banks” sometimes seen in news. 1. Neo banks are financial institutions with only an online presence and function digitally. 2. Neo banks have to apply for a banking licence with RBI. 3. Neo banks offer banking services like savings accounts, small loans and debit cards. Which of the above statements is/are correct?

    Asked in: GPSC Prelims CSP 2 2023

    1. 1, 2
    2. 1, 3
    3. 2, 3
    4. 1, 2, 3
    Show answer

    Answer: B. 1, 3

    Statement 1 is correct: Neo-banks are digital-first financial technology (FinTech) companies that operate exclusively online or through mobile apps, offering banking services without traditional physical branches. Statement 2 is incorrect: In India, pure neo-banks typically do not hold their own banking licence. Instead, they partner with traditional, licensed banks to offer banking services to customers. The banking activities are conducted under the license of the partner bank. Statement 3 is correct: Neo-banks, through partnerships with licensed banks, offer a range of banking services, including savings accounts, small loans, debit cards, credit cards, fund transfers, and various payment solutions.

  4. Which one of the following led the Malegam Committee to recommend for interest rate cap for micro-finance institutions ?

    Asked in: HPPSC HPAS Prelims 2010

    1. Promoters of micro-finance institutions growing rich
    2. High interest rate leading to suicides
    3. Small loans offered to micro-enterprises
    4. Borrowers stopped repaying loans
    Show answer

    Answer: B. High interest rate leading to suicides

    - The Malegam Committee was formed in the wake of a crisis in the microfinance sector in Andhra Pradesh. - The crisis involved high interest rates, coercive recovery, and borrower suicides. - The committee recommended interest rate caps to protect vulnerable borrowers.

  5. Consider the following statements: Loan Guarantee Scheme for Covid affected sectors (LGSCAS) with a Corpus of Rs. 2,000 crore was launched in 2021 for providing credit guarantee coverage to lending institutes for loans to projects under health care sector. The scheme provides credit guarantee of 50 percent to all greenfield projects and 75 percent to all brownfield projects to be set up at the centres other than metropolitan cities. For aspirational districts, the guarantee cover will be 50 percent for both brownfield expansion & greenfield projects. For non-aspirational districts the guarantee cover will be 75 percent for both brownfield expansion & greenfield projects. Which of the statements given above is/are correct?

    Asked in: HAS Prelims 2022

    1. 1 and 2 only
    2. 2 and 3 only
    3. 3 and 4 only
    4. 1 and 4 only
    Show answer

    Answer: B. 2 and 3 only

    - LGSCAS was launched in 2021 with a corpus of ₹50,000 crore. - It provides credit guarantees for loans to healthcare projects. - Guarantee percentages vary based on project type (greenfield/brownfield) and location (aspirational/non-aspirational districts). - In aspirational districts, guarantee is 75% for both greenfield and brownfield. - In non- aspirational districts, guarantee is 50% for greenfield and 75% for brownfield.

  6. On which date, the Ombudsman Scheme for the Non-Banking Financial Companies (NBFC), 2018 was effectively introduced by Reserve Bank of India ?

    Asked in: MPPSC CS Prelims 2020

    1. 26 January, 2018
    2. 23 January, 2018
    3. 26 February, 2018
    4. 23 February, 2018
    Show answer

    Answer: D. 23 February, 2018

    This scheme provided a dedicated and free mechanism for redressal of customer complaints against NBFCs.

  7. Sishu, Kishore and Tarun are the schemes of :

    Asked in: OPSC CS Prelims 2020

    1. Industrial Development Bank of India
    2. Micro Units Development and Reference Agency Ltd.
    3. Small Industries Development Bank of India
    4. Regional Rural Banks
    Show answer

    Answer: B. Micro Units Development and Reference Agency Ltd.

    Sishu, Kishore, and Tarun are the three loan product categories under the Pradhan Mantri MUDRA Yojana (PMMY). PMMY is a flagship scheme of the Government of India aimed at providing affordable credit to micro and small enterprises (MSEs) in the non-farm sector. MUDRA Ltd. (Micro Units Development and Refinance Agency Ltd.) is a public sector non-banking financial corporation established by the Government of India to support the growth of micro-enterprises. MUDRA provides refinance support to banks, NBFCs, and MFIs for lending to micro-enterprises. The loan categories under PMMY are: - Sishu: Loans up to ₹50,000 - Kishore: Loans above ₹50,000 and up to ₹5 lakh - Tarun: Loans above ₹5 lakh and up to ₹10 lakh These categories represent the schemes/products offered under the MUDRA framework.

Payment Systems in India: Digital Payments, UPI, and Central Bank Digital Currency (CBDC)

  1. Which organization launched Rupay card ?

    Asked in: APSC CCE Prelims Exam 2018

    1. RBI
    2. NPCI
    3. SBI
    4. Government of India
    Show answer

    Answer: B. NPCI

    It was conceived and launched by the National Payments Corporation of India (NPCI), the umbrella organisation for all retail payments systems in India.

  2. Who among the following was the Chairman of the Committee on Deepening Digital Payments appointed by the RBI ?

    Asked in: UPSC CDS 2 2019

    1. H.R. Khan
    2. Nandan Nilekani
    3. N.R. Narayana Murthy
    4. Sanjay Jain
    Show answer

    Answer: B. Nandan Nilekani

    The committee was tasked with reviewing the existing status of digitalization of payments in the country, identifying the bottlenecks and suggesting measures to accelerate the adoption of digital payments.

  3. The Digital Payments Index (DPI) is released by

    Asked in: GPSC Prelims CSP 2 2024

    1. Indian Banks’ Association
    2. Reserve Bank of India (RBI)
    3. NITI Aayog
    4. National Statistical Office (NSO)
    Show answer

    Answer: B. Reserve Bank of India (RBI)

    - The DPI provides a snapshot of the progress of digital payments adoption in India. - It captures parameters like Payment Enablers, Payment Infrastructure (Demand-side and Supply-side factors), Payment Performance, and Consumer Centricity.

  4. India's First Payment Bank that started its operation in November 2016 was

    Asked in: GPSC Prelims CSP 2 2017

    1. Airtel Payment Bank
    2. Aditya Birla Idea Payment Bank
    3. India Post Payment Bank
    4. PayTM Payment Bank
    Show answer

    Answer: A. Airtel Payment Bank

    Airtel Payment Bank launched its services nationally in November 2016, making it the first entity to begin operations as a Payments Bank in India.

  5. Ratan Wattle Committee was formed on which of the following ?

    Asked in: GPSC Prelims CSP 2 2017

    1. To review FRBM Act
    2. To study effects of demonetization
    3. For Digital Payments
    4. On giving licenses to payment banks
    Show answer

    Answer: C. For Digital Payments

    The committee's recommendations focused on policy and regulatory frameworks, infrastructure development, and awareness promotion for digital transactions.

  6. ________ is a mobile app launched to make India cash-free.

    Asked in: GPSC Prelims CSP 2 2019

    1. Bharat International for Money
    2. Bharat Incentives for Money
    3. Bharat Interface for Money
    4. None of the above
    Show answer

    Answer: C. Bharat Interface for Money

    BHIM stands for Bharat Interface for Money. It is a mobile payment application developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI). It was launched with the objective of enabling fast, secure, and reliable cashless transactions through mobile phones.

  7. Which of the following statements are correct regarding National Payments Corporation of India (NPCI)? 1. It is an initiative of RBI and Indian Banks Association 2. It was incorporated as a 'Not for Profit' Company in 2008 3. UPI, RuPay Card, and BHIM app are the major products of NPCI 4. This is an umbrella organization to operate Retail Payments and Settlement System in India

    Asked in: GPSC Prelims CSP 2 2022

    1. 1, 2, 3 and 4
    2. 1, 2 and 3 only
    3. 1, 3 and 4 only
    4. 2, 3 and 4 only
    Show answer

    Answer: A. 1, 2, 3 and 4

    - NPCI was indeed an initiative of the Reserve Bank of India (RBI) and the Indian Banks' Association (IBA). - It was incorporated as a 'Not for Profit' Company under Section 25 of the Companies Act, 1956 (now Section 8 of the Companies Act, 2013) in 2008. - NPCI is the entity that developed and operates major retail payment systems in India, including UPI, RuPay card network, BHIM app, Immediate Payment Service (IMPS), Aadhaar enabled Payment System (AEPS), National Automated Clearing House (NACH), etc. - It functions as the umbrella organisation for operating retail payments and settlement systems in India, overseeing various digital payment mechanisms.

Reserve Bank of India (RBI): Role, Functions, and Autonomy

  1. Meena Hemachandra Committee has been constituted by RBI on

    Asked in: GPSC Prelims CSP 2 2017

    1. Demonetization
    2. Cyber Security
    3. Loan Waiver Policy
    4. None of the above
    Show answer

    Answer: B. Cyber Security

    The Reserve Bank of India (RBI) formed a High- Level Committee headed by its Executive Director, Meena Hemachandra, to review the current cyber security landscape and make recommendations to strengthen cyber resilience in the banking sector.

  2. World Gold Council released the 2019 list of Gold Reserves in each country. Which of the following statements are correct? 1. USA topped the list with reserves of nearly 8133 tonnes 2. India has ranked 9th within individual country category excluding the IMF in the list 3. India has ranked 10th within overall country category including the IMF in the list 4. India is having approximately 2000 tonnes of gold reserves (With Government) according to the Report.

    Asked in: GPSC Prelims CSP 2 2019

    1. 1, 2, 3 and 4
    2. 2, 3 and 4 only
    3. 1, 2 and 3 only
    4. 2 and 3 only
    Show answer

    Answer: C. 1, 2 and 3 only

    Statement 1: USA indeed topped the list with the largest reported gold reserves (over 8,000 tonnes). Statement 2: India was ranked 9th among individual countries holding gold reserves (excluding international bodies like the IMF). Statement 3: Including the IMF (which holds significant reserves), India's rank in the overall list was 10th. Statement 4 is incorrect; India's gold reserves with the government (RBI) were around 626-630 tonnes in 2019, not 2000 tonnes.

  3. Consider the following statements. 1. The Reserve Bank of India Act, 1934 gives RBI the sole right to issue banknotes in India. 2. Any change in design of a currency note has to be approved by the RBI's Central Board and the Central Government. 3. The RBI's Department of Currency Management headed by the RBI Governor has the responsibility of administering the core function of currency management. Which of the above statements is/are correct?

    Asked in: GPSC Prelims CSP 2 2023

    1. 1, 2
    2. 1, 3
    3. 2, 3
    4. 1, 2, 3
    Show answer

    Answer: A. 1, 2

    Statement 1 is correct: Section 22 of the Reserve Bank of India Act, 1934 explicitly grants the RBI the sole right to issue banknotes in India. Statement 2 is correct: Any change in the design, form, or material of bank notes is initiated by the RBI's Department of Currency Management, but it requires the approval of the RBI's Central Board and the final sanction of the Central Government. Statement 3 is incorrect: The Department of Currency Management (DCM) is responsible for administering the function of currency management within the RBI. However, the DCM is typically headed by an Executive Director or a Chief General Manager, not the RBI Governor. The Governor is the head of the entire organization.

  4. Which of the following country joins EURO ZONE in 2014 ?

    Asked in: KPSC KAS Prelims 2014

    1. Greece
    2. Cyprus
    3. Ireland
    4. Latvia
    Show answer

    Answer: D. Latvia

    Countries wishing to join the Eurozone must meet specific economic and legal criteria, known as the convergence criteria or Maastricht criteria. Latvia successfully met these requirements and became the 18th member state of the Eurozone.

  5. Consider the following statements about the Reserve Bank of India :

    Asked in: KPSC KAS Prelims 2015

    1. Reserve Bank of India was nationalized on 1st January 1949.
    2. Reserve Bank of India is a member bank of the Asian Clearing Union. Which of the above statements is/are correct ? Select the code for the correct answer from the options given below : A. A only B. B only
    3. Both A and B
    4. Neither A nor B
    Show answer

    Answer: C. Both A and B

    The RBI is India's central bank and regulatory body responsible for the regulation of the Indian banking system.

  6. Which of the following is one of the core functions of the Reserve Bank of India ?

    Asked in: MPSC CS Prelims 2012

    1. To act as tax collector for the Govt. of India
    2. Work as Banker to the Banks
    3. Help in finalization of the Union Budget
    4. Participate in the various meetings of financial institutions
    Show answer

    Answer: B. Work as Banker to the Banks

    RBI maintains the banking accounts of all scheduled banks. It provides banking facilities, acts as a clearinghouse for inter-bank transactions, and serves as the lender of last resort to commercial banks.

  7. Note issuing department of RBI should always possess a minimum gold stock worth

    Asked in: MPSC CS Prelims 2015

    1. ₹ 85 crores
    2. ₹ 115 crores
    3. ₹ 200 crores
    4. None of the above
    Show answer

    Answer: B. ₹ 115 crores

    - The Reserve Bank of India operates under the Minimum Reserve System (MRS) for the issue of currency notes, as per the RBI Act, 1934. - Under MRS, RBI is required to maintain a minimum reserve of ₹ 200 crores in total, consisting of gold coin and gold bullion, and foreign securities. - Out of this ₹ 200 crores, a minimum of ₹ 115 crores must be held in gold coin and gold bullion. The remaining ₹ 85 crores can be in the form of foreign securities.