Money and Monetary Policy

1.Functions and Forms of Money

• Barter System and Double Coincidence of WantsImportance 2/5
  What is barter, and what is a double coincidence of wants? Understand why this requirement makes barter hard to run in a large economy, and how an accepted intermediate commodity removes the difficulty.
• Functions of MoneyImportance 3/5
  Know the functions of money: medium of exchange, unit of account, store of value, and the commonly added standard of deferred payment. Understand why inflation weakens the store-of-value function, and why gold or property can store value but lack the universal acceptability of money.
• From Commodity Money to Fiat MoneyImportance 2/5
  Why did the commodity used as money have to be scarce? Understand how money moved from gold and silver to paper receipts and then to notes issued against other assets. What problems does metallic money face as output grows, and why did banks come in between the RBI and the public?
• Fiat Money and Legal TenderImportance 4/5UPSC 2018
  What makes currency notes and coins fiat money and legal tender? Be clear about the difference between legal tender and general acceptability. Can a cheque or a bank deposit be refused in payment? Also know the difference between limited and unlimited legal tender.
• Who Issues Currency in IndiaImportance 4/5
  Which notes does the RBI issue, and which currency does the Government issue? Remember who signs the one-rupee note, the law behind coins, and the limit on coin denominations. Understand whose liability each form is and how all currency reaches circulation.
• Asset Backing of Banknotes and the Minimum Reserve SystemImportance 3/5
  Which assets back the notes issued by the RBI, and under which Section? Understand the "I promise to pay" clause and what Section 26 adds to it. Remember how the minimum reserve system works, including the minimum total and the minimum gold component within it.
• Demand Deposits, Term Deposits and ChequesImportance 2/5
  How do demand deposits and term (fixed) deposits differ? What is an overdraft? Understand a cheque as an instruction to pay out of a demand deposit.
• SeigniorageImportance 3/5
  Understand what seigniorage is, and how it relates to the cost of producing money. Be clear about the three ways a central bank can earn it: income on the assets held against currency, the reserve balances banks keep with it, and the inflation tax.
• Demonetisation of 2016Importance 3/5
  Remember the date, the notes covered, their share in the currency and the RBI Act power under which demonetisation was done. Understand its short-run effects on liquidity, on money supply, and on GDP as both a demand shock and a supply shock.

2.Money Supply and Monetary Aggregates

• Meaning of Money Supply: What Counts and What Does NotImportance 3/5
  Be clear about how money supply is defined. Which deposits and cash are counted, and why are inter-bank deposits and cash held by banks, the RBI and the Government left out? How does currency in circulation differ from currency with the public?
• Reserve Money (M0) and Its ComponentsImportance 4/5
  Learn what reserve money contains and the other names it goes by. How does it differ from money supply? Understand which RBI actions raise it, such as buying foreign exchange or government securities.
• Measures of Money Supply: M1, M2, M3 and M4Importance 5/5UPSC 1997, 2002
  Remember what each of M1, M2, M3 and M4 includes, with the post office deposits that enter M2 and M4. Be clear on whether "other deposits with the RBI" belong in M1, and which measures the RBI mainly uses now. Also be aware of the newer aggregates (NM1 to NM3 and L1 to L3).
• Narrow Money, Broad Money and the Order of LiquidityImportance 4/5UPSC 1997, 2013
  Which of the four measures are called narrow money, and which broad money? Remember their order of liquidity. Why is M3 the most widely used measure, and what is it also called?
• How Transactions Change Money Supply and the Monetary BaseImportance 4/5UPSC 2012, 2020
  Can you tell whether a transaction changes money supply, reserve money, both or neither? Work through these cases: withdrawing cash from a bank, a bank depositing cash with the RBI, the Government collecting tax into its RBI account, and the RBI swapping gold for foreign exchange or securities.
• Velocity of Money and the Quantity EquationImportance 3/5
  What does velocity of money measure? Remember the equation MV = PY, and understand how growth in money supply links to nominal GDP and prices. Think through the four cases of money supply and output rising or falling, and what each does to prices.

3.Money Creation and the Money Multiplier

• Assets and Liabilities of a Commercial BankImportance 3/5UPSC 2019
  Know what sits on each side of a commercial bank's balance sheet. Which items count as assets, and which as liabilities? Where do the demand liabilities and net worth fit in?
• Fractional Reserve Banking and Credit CreationImportance 4/5
  How does a bank create money by keeping only a fraction of deposits as reserves? Be able to explain the step-by-step process from the first deposit through repeated lending, and why the final money supply is larger than the reserve money first put in.
• Currency-Deposit Ratio and Reserve-Deposit RatioImportance 4/5
  Learn what each ratio measures and its formula. Who or what decides each of them? Understand how each affects credit creation, and think about what should count as reserves in the reserve-deposit ratio.
• Money Multiplier: Formula and DeterminantsImportance 5/5UPSC 2019, 2021
  How is the money multiplier worked out, both as money supply over reserve money and through the two ratios? Be able to do a simple calculation. Understand what happens to it when a ratio changes, when banking habits spread, or when the CRR changes.

4.RBI and Its Functions

• Establishment and Evolution of RBIImportance 3/5UPSC 2004
  Remember how the RBI came into being (the Hilton Young Commission), its Act, when it began work and when it was nationalised, and which functions it took over. Understand its development role and the institutions it helped set up, and the objective given to it in the RBI Act.
• Central Board of DirectorsImportance 2/5
  Who sits on the Central Board of the RBI? Remember its maximum size, the groups of members, who appoints them and for how long.
• Governor and Deputy Governors: Appointment, Tenure and RemovalImportance 3/5UPSC 2021
  Who appoints the Governor and the Deputy Governors, and who can remove them? How many Deputy Governors can there be? Know how candidates are searched for, and the term of office and re-appointment for both offices. Understand where the Governor's powers come from, and whether the Act prescribes any qualification.
• Laws Administered by RBIImportance 2/5
  Which are the main laws the RBI administers across banking, foreign exchange, government securities and public debt, securitisation, credit information and payment systems? Which chapter of the SARFAESI Act gives the RBI its role?
• RBI's Functions and Its Shift to Core Central BankingImportance 3/5UPSC 2001
  Remember the main functions of the RBI. Understand how its focus moved after 1991 towards monetary policy, bank supervision, payment systems and the development of financial markets.
• Regulation and Supervision of Banks and NBFCsImportance 3/5UPSC 2013
  Remember what the RBI controls in banks (licensing, branches, mergers, directors, reserves, prudential norms, KYC) and which other bodies it regulates. Why are its powers limited over public sector banks? How did the Banking Regulation (Amendment) Act 2020 narrow dual control over cooperative banks, and what powers did the RBI gain? What power does it have over NBFC boards?
• Regulation of Foreign Exchange, Government Securities and Money MarketsImportance 3/5
  Which laws give the RBI its powers over the foreign exchange market, the government securities market and the money market? Understand why FERA gave way to FEMA.
• Custodian and Manager of Foreign Exchange ReservesImportance 3/5
  Remember the four components of the foreign exchange reserves, including the Reserve Tranche Position in the IMF. Know where the RBI may invest them and the principles that guide it. Understand how the way of judging adequacy has moved beyond import cover.
• Banker and Debt Manager to GovernmentsImportance 4/5UPSC 2001, 2004
  Remember how the RBI works as banker to the Centre and States: agency banks, the government accounts it keeps, and its roles as portfolio manager and adviser. Understand what its debt management tries to achieve.
• Ways and Means AdvancesImportance 4/5
  Why do governments take Ways and Means Advances? How long are they meant to run? How does the interest rate change with duration and in overdraft, and how are limits set for the Centre and for the States? How do they differ from tradable government securities? Can they fund the fiscal deficit? What happens when the limit is crossed?
• Banker to Banks and Lender of Last ResortImportance 4/5UPSC 2012, 2021
  Remember the services the RBI gives banks as their banker. As lender of last resort, which banks does it help, on what terms and only after what other options? Why does it matter whether a bank has a liquidity problem or is insolvent? How does this role prevent bank runs?
• Currency ManagementImportance 2/5
  How do the RBI and the Government share the design and supply of notes? Understand how security features guard against counterfeiting, and remember what issue offices and currency chests are.
• Oversight of Payment and Settlement SystemsImportance 2/5
  Which law gives the RBI power over payment systems, and what does its Section 4 require? Do licensed banks also need separate authorisation? Remember the types of authorised operators, with NPCI as one example.
• Developmental Role of RBIImportance 2/5
  What does the developmental role cover? Remember the Lead Bank Scheme (year, a district lead bank's tasks, extension to metropolitan districts). Understand priority sector lending and Kisan Credit Cards as examples of developmental tools.
• Research, Data and Statutory PublicationsImportance 2/5
  Which publications does the law require the RBI to bring out, and under which provisions? Is the Monetary Policy Report a legal requirement, and since when? Also remember its other regular publications such as the Financial Stability Report, its household surveys, and India's SDDS commitment.

5.RBI's Income and Economic Capital Framework

• Sources of Income of RBIImportance 4/5UPSC 1998, 2025
  How does the RBI earn its income? Remember the main sources, including what it earns on foreign currency assets and securities, its trading in foreign exchange and bonds, and seigniorage.
• Economic Capital and the Purpose of the Economic Capital FrameworkImportance 3/5
  What is economic capital? What does Section 47 of the RBI Act require before profit goes to the Government, and how does the framework decide the size of those provisions? Understand why risk buffers come before the transfer. Be clear about the difference between the Contingency Fund and the Currency and Gold Revaluation Account.
• Earlier Committees on RBI Reserves (Usha Thorat, Malegam)Importance 2/5
  Remember the Usha Thorat Committee (2004) and the Malegam Committee (2013), and the broad thrust of what each recommended on the RBI's reserves and the use of its profit.
• Bimal Jalan Committee (2019)Importance 4/5
  Why was the Bimal Jalan Committee set up, and what did it recommend on risk buffers and surplus transfer? Remember the buffer range and the realised-equity basis for transfers. Understand its remark about harmony between the Government and the RBI.
• Revised Economic Capital Framework (2025) and Surplus Transfer to GovernmentImportance 4/5
  What changed in the 2025 revision of the framework? Know the current buffer range and the other buffer changes. Understand why a higher buffer means a smaller transfer, why recent transfers have been large, and what the yearly transfer means for the Government's finances.

6.Relationship Between RBI and Government

• Section 7 of the RBI Act: Power of the Government to Give DirectionsImportance 4/5UPSC 2021
  What does Section 7 allow the Government to do, and what must it do first? Understand what happens to decision-making inside the RBI if directions are issued. Know whether and how the provision has been used in practice.
• Governor and Central Board: Where Powers LieImportance 2/5
  Is the RBI Governor an agent of the Central Board, as a managing director is of a company's board? Understand where the Governor's powers come from and what role the Board plays in practice.
• Autonomy and Accountability of RBIImportance 4/5
  Why should the RBI be autonomous, and why must it still answer to the Government? Be able to explain both arguments, including the separation of the spender from the creator of money. Understand other ways the Government influences the RBI, such as target-setting, MPC nominees and surplus transfer.
• Views of Former Governors on RBI AutonomyImportance 2/5
  Who held which view on RBI autonomy? Remember the position taken by Manmohan Singh, Bimal Jalan, D. Subbarao and Y. V. Reddy.

7.Monetary Policy Framework and the MPC

• Meaning and Objectives of Monetary PolicyImportance 4/5UPSC 2022, 2023
  Remember how monetary policy is defined and the objectives it pursues in India: price stability, growth, credit flow, financial stability and exchange rate stability. Understand why price stability has come first since 2016.
• Expansionary and Contractionary Monetary PolicyImportance 4/5UPSC 2020
  How do expansionary and contractionary policy differ in aim, in the rate and liquidity moves involved, and in when each is used? Remember the other names used for each.
• Monetary Policy StancesImportance 3/5
  What does a stance tell the market about future rates? This is called forward guidance: understand how it shapes expectations and transmission. Be clear about the official stance labels (such as accommodative, neutral and calibrated tightening) and how they differ from informal labels like hawkish and dovish. How does a stance differ from a rate decision? Know the stance now in force.
• Approaches to Monetary PolicyImportance 3/5
  How do the approaches differ: monetary targeting, anchoring the exchange rate (Singapore as an example), watching multiple indicators, and inflation targeting? Understand the order in which India followed them, the role of the Chakravarty Committee, and why India moved to inflation targeting.
• Urjit Patel Committee and the Move to Flexible Inflation TargetingImportance 4/5UPSC 2026
  What did the Urjit Patel Committee recommend, and in which year? Remember its target and band, and the idea of a committee to decide policy. What does "flexible" mean here, and how does it relate to growth and expectations?
• Monetary Policy Framework Agreement (2015) and the 2016 RBI Act AmendmentImportance 4/5
  When was the Monetary Policy Framework Agreement signed, and what were its main terms? How did the 2016 amendment to the RBI Act put the framework into law? Know where in the Act the MPC and inflation-targeting provisions sit.
• Inflation Target: Who Sets It, Which Index and What BandImportance 5/5UPSC 2022
  Who sets the inflation target, and how often? Remember the index it is measured against, and the series and base year now in use. Know the target and the band, and the period now notified. Why was this index preferred to WPI?
• Failure to Meet the Inflation Target and AccountabilityImportance 4/5
  When is the RBI treated as having failed the target? Remember the number of quarters involved. What must the RBI then report to the Government?
• Review of the Flexible Inflation Targeting Framework (Headline versus Core)Importance 4/5
  What questions did the RBI's 2025 review of the framework raise, and what was the outcome? Explain the case for and against targeting core inflation instead of headline CPI. How did the new CPI series change the weight of food, and why does that matter here? Understand why interest rates alone cannot easily curb supply-driven inflation.
• Composition of the MPCImportance 4/5UPSC 2017
  How many members does the MPC have, and how are they split between the RBI and the Government's nominees? Remember who chairs it, the term of the external members and whether they can be reappointed, and when the MPC was constituted.
• MPC Decision-Making, Meetings and TransparencyImportance 4/5
  How does the MPC decide? Remember the voting rule, the Governor's casting vote, the quorum, and whether its decisions bind the RBI. Know the minimum number of meetings, the usual practice, off-cycle meetings, and what is published afterwards (resolution, minutes and their timing, Monetary Policy Report).
• What the MPC Decides and What It Does NotImportance 3/5UPSC 2017
  Which rate does the MPC decide? Understand why the CRR, the SLR, the reverse repo rate and liquidity operations are not its decisions. Is the exchange rate something the MPC considers?

8.Instruments of Monetary Policy

• Repo RateImportance 5/5UPSC 2007
  What is the repo rate, and how does a repo work? Understand the collateral, who can borrow, and how a change in the rate affects money supply and inflation. Know the current repo rate and the reason for its latest change.
• Reverse Repo Rate and Its Changed RoleImportance 3/5
  What is the reverse repo rate, and how does it differ from repo in the direction of liquidity? Understand why it no longer serves as the floor of the corridor.
• Standing Deposit FacilityImportance 4/5
  What is the Standing Deposit Facility, and why does it need no collateral? Understand its place in the corridor, who decides when it is used, and its role in financial stability. Know how access to it has widened recently.
• Marginal Standing FacilityImportance 4/5UPSC 2014, 2020
  What is the Marginal Standing Facility, and why is it a penal rate? Understand how banks borrow by dipping into their SLR holdings, how its collateral differs from repo's, and where it sits in the corridor. Know the current borrowing limit.
• Bank RateImportance 4/5UPSC 4 Years
  Under which Section is the Bank Rate published? Understand why it became dormant after the LAF came in, how it is now tied to the MSF rate, and what it is used for today.
• LAF CorridorImportance 4/5
  Which rates form the floor, the ceiling and the middle of the LAF corridor? Remember which rate held the floor earlier. Understand how a symmetric corridor guides the overnight call rate.
• Net Demand and Time LiabilitiesImportance 3/5UPSC 2014
  What are Net Demand and Time Liabilities? Understand why reserve ratios are set on them, and how the reporting and maintenance cycle for reserves changed from December 2025.
• Cash Reserve RatioImportance 5/5UPSC 2010, 2014
  What is the CRR, where is it kept, and under which law is it set? Does it earn interest? Which banks must maintain it? Understand how a change in it alters banks' lendable funds and the money multiplier. Know the current CRR and the phased cut made in 2025.
• Statutory Liquidity Ratio and How It Differs from CRRImportance 5/5UPSC 4 Years
  What is the SLR, in which assets can banks hold it, and under which law? Is there a ceiling? How does it differ from the CRR in where it is kept, its form, its return and its law? Understand why both ratios protect depositors.
• Open Market Operations: Outright and RepoImportance 5/5UPSC 2013, 2015, 2022
  What are open market operations? Understand how buying and selling securities injects or absorbs durable liquidity. How do outright and repo-type OMOs differ?
• Market Stabilisation SchemeImportance 3/5
  Why was the Market Stabilisation Scheme created in 2004? Understand how it absorbs liquidity, why OMOs and the LAF were not enough for this task, and who bears its carrying cost.
• SterilisationImportance 4/5UPSC 2023
  Why does foreign exchange intervention change the domestic money supply? Explain how the RBI offsets this when it buys dollars and when it sells them, and which tools (OMOs, MSS) it uses in each case. In each case, in which direction does rupee liquidity move?
• Operation TwistImportance 3/5
  What does the RBI buy and sell in Operation Twist? Understand what happens to short-term and long-term yields, how this changes borrowing costs and investment, and why total liquidity does not change.
• Margin RequirementsImportance 2/5
  What is a margin requirement? Understand how raising or lowering it tightens or eases credit.
• Selective Credit ControlImportance 3/5UPSC 1995
  How can selective credit control direct credit towards some sectors and hold it back from others? Know the kinds of sectors in each case.
• Moral SuasionImportance 3/5
  What is moral suasion, and why does it work without legal force? Remember examples of what the RBI uses it for, such as passing rate cuts on to borrowers, opening rural branches, priority sector lending and financial literacy.
• Quantitative versus Qualitative ToolsImportance 3/5
  Which instruments are quantitative (general), and which are qualitative (selective)? Understand the difference between direct and indirect instruments.

9.Liquidity Management and the Liquidity Trap

• Liquidity Adjustment Facility and Other Liquidity ToolsImportance 4/5
  Which operations make up the Liquidity Adjustment Facility? Which liquidity tools sit outside it? Understand how short-term liquidity differs from durable liquidity, and why the RBI conducts term repos.
• Main and Fine-Tuning Liquidity Operations (VRR and VRRR)Importance 3/5
  Which of VRR and VRRR injects liquidity, and which absorbs it? Know which tenor is now the main operation. What are fine-tuning operations for?
• Term Repo, LTRO and Targeted LTROImportance 3/5
  How does a term repo differ from an overnight repo? At what rate and for which tenors did the RBI run its LTROs in 2020? Understand what makes a TLTRO targeted, and think about when the RBI would use them.
• Surplus and Deficit Liquidity and What Drives ThemImportance 3/5
  What do surplus and deficit liquidity mean? Understand how currency demand, Government cash balances with the RBI and forex operations move system liquidity, how the RBI responds, and what each condition does to overnight rates.
• Operating Target of Monetary Policy: Weighted Average Call RateImportance 4/5
  Why does the RBI treat the Weighted Average Call Rate as its operating target? Understand how the RBI keeps it in line with the repo rate, and what a gap between the two signals.
• Demand for Money: Transaction and Speculative MotivesImportance 3/5UPSC 2013
  Why do people hold money? Remember what transaction demand depends on and what speculative demand depends on. Also learn the precautionary motive, the third of Keynes's three motives.
• Bond Prices, Interest Rates and Speculative Demand for MoneyImportance 3/5
  Why do bond prices and interest rates move in opposite directions? Explain how expectations about future rates shape the speculative demand for money when rates are low and when they are high.
• Nominal and Real Interest RatesImportance 3/5
  How are the nominal rate, inflation and the real rate related? Understand why savers need a deposit rate above inflation, and what happens to the real rate when nominal rates reach zero but prices keep falling.
• Liquidity TrapImportance 4/5
  When does a liquidity trap occur? Explain why monetary policy loses its grip there, why it is called a "trap", and which kind of policy can help the economy out of it.
• Unconventional Monetary Policy: ZIRP, NIRP and Helicopter MoneyImportance 3/5
  How do ZIRP, NIRP and helicopter money differ? How is ZIRP linked to the liquidity trap? Who finances helicopter money? Know which countries have used negative rates, and whether they still do.

10.Transmission of Monetary Policy

• Meaning of Monetary Policy TransmissionImportance 3/5
  What is monetary policy transmission? Understand the sequence from a repo rate change to the call rate, market rates, bank rates, spending, output and inflation, and why delays occur along the way.
• Channels of Monetary Policy TransmissionImportance 4/5UPSC 2014
  Be able to explain how the interest rate, exchange rate, credit, asset price and expectations channels each work. In an easing, what happens to import costs through the exchange rate channel?
• From Internal to External Benchmarks: Lending Rates and TransmissionImportance 4/5
  Why did internal benchmark lending rates weaken transmission? Remember the order in which these came in: the base rate, MCLR and the benchmark prime lending rate. Understand what the external benchmark system of 2019 changed, which loans it covers and what benchmark options banks have.
• Factors That Weaken Transmission in IndiaImportance 4/5
  Why do policy rate changes reach borrowers slowly or only in part? Explain factors such as costly deposits as savings move to markets, sticky deposit and small savings rates, bad loans and weak capital, heavy Government borrowing, informal credit and supply-driven inflation.

1. 1.

   With reference to the measures of money supply in India, consider the following statements:
   1. M1 includes the currency with the public and the demand deposits of the public with banks.
   2. M3 is M1 plus the savings deposits with the Post Office Savings Bank.
   3. M4 is obtained by adding the total deposits with the Post Office Savings Bank to M3.
   Which of the statements given above is/are correct?

   1. A1 and 2 only
   2. B2 and 3 only
   3. C1 only
   4. D1 and 3 only
2. 2.

   Consider the following statements about the money multiplier:
   1. It is the ratio of money supply to the monetary base (reserve money).
   2. Its value depends on the currency-deposit ratio and the reserve-deposit ratio.
   3. It rises when the banking habit of the people increases.
   4. With the reserve-deposit ratio unchanged, a rise in the currency-deposit ratio raises the money multiplier.
   How many of the statements given above are correct?

   1. AOnly one
   2. BOnly two
   3. COnly three
   4. DAll four
3. 3.

   As of October 2026, the inflation target of 4 per cent with a tolerance band of plus or minus 2 per cent, measured on the Consumer Price Index, has been notified by the Central Government for which period?

   1. A1 April 2021 to 31 March 2026
   2. B1 April 2022 to 31 March 2027
   3. C1 April 2026 to 31 March 2029
   4. D1 April 2026 to 31 March 2031
4. 4.

   Consider the following statements about the Monetary Policy Committee (MPC):
   1. It has six members, three from the RBI including the Governor and three appointed by the Central Government.
   2. The members appointed by the Central Government hold office for four years and are eligible for re-appointment.
   3. It decides the repo rate as well as the Cash Reserve Ratio and the Statutory Liquidity Ratio.
   How many of the statements given above are correct?

   1. AOnly one
   2. BOnly two
   3. CAll three
   4. DNone
5. 5.

   Consider the following statements:
   Statement-I: A surge in foreign capital inflows can add to inflation in the recipient economy.
   Statement-II: When the RBI buys the foreign currency brought in by foreign investors (for instance, to prevent the rupee from appreciating), it pays in newly created rupees, which, unless sterilised, raise the monetary base and the money supply without a matching rise in output.
   Which one of the following is correct in respect of the above statements?

   1. ABoth Statement-I and Statement-II are correct and Statement-II explains Statement-I
   2. BBoth Statement-I and Statement-II are correct and Statement-II does not explain Statement-I
   3. CStatement-I is correct but Statement-II is incorrect
   4. DStatement-I is incorrect but Statement-II is correct
6. 6.

   Consider the following pairs:

   Rate	Position in the LAF corridor
   1. Standing Deposit Facility rate	Floor
   2. Policy repo rate	Middle
   3. Reverse repo rate	Floor since April 2022

   Which of the pairs given above is/are correctly matched?

   1. A1 only
   2. B2 and 3 only
   3. C1 and 2 only
   4. D1, 2 and 3
7. 7.

   Match List I with List II:

   List I (Body)	List II (Link with the RBI and monetary policy)
   A. Hilton Young Commission	1. Recommended that surplus distribution consider total realised equity
   B. Urjit Patel Committee	2. Advised monetary targeting, adopted in 1985
   C. Chakravarty Committee	3. Recommendations on which the RBI was set up
   D. Bimal Jalan Committee	4. Proposed the flexible inflation targeting model

   Select the correct answer using the code given below:

   1. AA-1, B-4, C-2, D-3
   2. BA-3, B-2, C-4, D-1
   3. CA-3, B-4, C-2, D-1
   4. DA-2, B-4, C-3, D-1
8. 8.

   With reference to Section 7 of the Reserve Bank of India Act, 1934, consider the following statements:
   1. It enables the Central Government to give directions to the RBI in the public interest.
   2. The Central Government may issue such directions without consulting the Governor.
   3. Subject to such directions, the superintendence of the RBI's affairs vests in the Central Board.
   Which of the statements given above is/are correct?

   1. A1 only
   2. B1 and 3 only
   3. C2 and 3 only
   4. D1, 2 and 3
9. 9.

   Under Section 8(4) of the Reserve Bank of India Act, 1934, the Governor and the Deputy Governors of the RBI hold office for

   1. Aa term not exceeding five years, as fixed by the Central Government, and are eligible for re-appointment
   2. Ba term not exceeding three years, as fixed by the Central Government, and are eligible for re-appointment
   3. Ca fixed term of five years, without eligibility for re-appointment
   4. Da term ending when the incumbent attains a prescribed age, irrespective of the Central Government
10. 10.

    Consider the following statements about Ways and Means Advances (WMA) given by the RBI:
    1. They are a temporary facility meant to meet temporary mismatches in the receipts and payments of the government.
    2. They are a non-tradable loan, unlike Treasury Bills and dated securities.
    3. They are used to fund the fiscal deficit of the government.
    How many of the statements given above are correct?

    1. AOnly one
    2. BOnly two
    3. CAll three
    4. DNone
11. 11.

    Regarding the RBI's role as the lender of last resort to banks, consider the following statements:
    1. Emergency liquidity assistance is given only after the troubled institution has exhausted the resources it can obtain from the market and from the RBI's regular liquidity facilities.
    2. It is meant for banks that have become insolvent and cannot be revived.
    3. The funds are supplied against good collateral at a penal rate of interest.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B3 only
    3. C2 and 3 only
    4. D1 and 3 only
12. 12.

    With reference to currency in India, consider the following statements:
    1. The one-rupee note is issued by the Government of India and is signed by the Finance Secretary.
    2. A cheque drawn on a bank deposit is legal tender and cannot be refused in payment.
    3. The banknotes issued by the RBI, other than the one-rupee note, are a liability of the Government of India and not of the RBI.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B1 and 3 only
    3. C2 only
    4. D2 and 3 only
13. 13.

    Consider the following statements about banknotes issued by the RBI:
    1. Banknotes other than the one-rupee note are backed by assets such as gold, Government securities and foreign currency assets, as defined in Section 33 of the RBI Act.
    2. Under the minimum reserve system, gold coin, gold bullion and foreign securities together must be at least ₹200 crore, of which gold must be at least ₹115 crore.
    3. On the recommendation of the Central Board, the Central Government may by notification in the Gazette declare any series of banknotes to cease to be legal tender.
    How many of the statements given above are correct?

    1. AOnly one
    2. BOnly two
    3. CAll three
    4. DNone
14. 14.

    With reference to reserve requirements for banks in India, consider the following statements:
    1. The Cash Reserve Ratio is the cash that scheduled commercial banks must maintain with the RBI as a proportion of their Net Demand and Time Liabilities.
    2. The Statutory Liquidity Ratio is maintained by banks with themselves in safe and liquid assets such as government securities, gold and cash.
    3. The Cash Reserve Ratio is subject to a statutory ceiling prescribed in the RBI Act.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B1 and 2 only
    3. C2 and 3 only
    4. D1, 2 and 3
15. 15.

    As of October 2026, the new series of the Consumer Price Index released by the Ministry of Statistics and Programme Implementation, with data starting from January 2026, has which base year?

    1. A2012
    2. B2024
    3. C2011-12
    4. D2022-23
16. 16.

    With reference to the decision-making of the Monetary Policy Committee (MPC) of the RBI, consider the following statements:
    1. A meeting of the MPC requires a quorum of four members, including the Governor or, in his absence, the Deputy Governor who is a member of the Committee.
    2. If the votes are equally divided, the Governor has a second or casting vote.
    3. A decision of the MPC is only advisory for the RBI, which may set it aside by a resolution of its Central Board.
    Which of the statements given above is/are correct?

    1. A1 and 2 only
    2. B1 and 3 only
    3. C2 and 3 only
    4. D1, 2 and 3
17. 17.

    With reference to monetary policy, consider the following statements:
    1. Expansionary monetary policy is also called easy money policy.
    2. Contractionary monetary policy is generally adopted when the economy is overheating with high inflation.
    3. Contractionary monetary policy aims to increase the money supply so as to stimulate investment.
    4. Expansionary monetary policy curbs aggregate demand and thereby stabilises inflation.
    How many of the statements given above are correct?

    1. AOnly one
    2. BOnly two
    3. COnly three
    4. DAll four
18. 18.

    With reference to the Statutory Liquidity Ratio (SLR) in India, consider the following statements:
    1. The maintenance of the SLR by all banks, scheduled and non-scheduled, commercial and cooperative, is governed by Section 24 of the Banking Regulation Act, 1949.
    2. Excess balances held by a bank with the RBI under the Cash Reserve Ratio can also be counted as liquid assets for the purpose of the SLR.
    3. The Banking Regulation Act, 1949 prescribes a statutory ceiling of 25 per cent on the SLR.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B2 and 3 only
    3. C1, 2 and 3
    4. D1 and 2 only
19. 19.

    Match List I with List II:

    List I (Instrument)	List II (Feature)
    A. Marginal Standing Facility	1. Sale of short-term and purchase of long-term government securities to flatten the yield curve
    B. Market Stabilisation Scheme	2. Overnight borrowing by banks from the RBI by dipping into their SLR portfolio, at a penal rate
    C. Bank Rate	3. Introduced in 2004 to absorb enduring surplus liquidity from capital inflows by issuing Treasury bills and dated securities
    D. Operation Twist	4. Rate used for calculating penalty on shortfalls in the CRR and the SLR

    Select the correct answer using the code given below:

    1. AA-2, B-3, C-1, D-4
    2. BA-4, B-3, C-2, D-1
    3. CA-2, B-1, C-4, D-3
    4. DA-2, B-3, C-4, D-1
20. 20.

    Consider the following statements:
    Statement-I: Through lending by banks, the total money supply in an economy can grow to a multiple of the reserve money created by the central bank.
    Statement-II: Under fractional reserve banking, a bank must hold every rupee of its deposits as reserve in its own vault and can lend only out of its own capital.
    Which one of the following is correct in respect of the above statements?

    1. ABoth Statement-I and Statement-II are correct and Statement-II explains Statement-I
    2. BBoth Statement-I and Statement-II are correct and Statement-II does not explain Statement-I
    3. CStatement-I is correct but Statement-II is incorrect
    4. DStatement-I is incorrect but Statement-II is correct
21. 21.

    Consider the following pairs:

    Measure of money	Description
    1. M1	Narrow money
    2. M2	Broad money
    3. M3	Also called aggregate monetary resources

    Which of the pairs given above is/are correctly matched?

    1. A1 and 3 only
    2. B1 only
    3. C2 and 3 only
    4. D1, 2 and 3
22. 22.

    As of October 2026, under the revised liquidity management framework of the Reserve Bank of India, which one of the following is the operating target of monetary policy?

    1. APolicy repo rate
    2. BWeighted Average Call Rate
    3. CBank Rate
    4. DMarginal Standing Facility rate
23. 23.

    Consider the following statements about the sources of income of the Reserve Bank of India:
    1. It earns interest on its foreign currency assets, which it has invested in foreign government bonds and also deposited with other central banks.
    2. It earns interest on the Indian government securities it holds after purchasing them through open market operations.
    3. It earns commission from the Central and State Governments for managing their public debt.
    4. It earns no income from its lending to banks at the repo rate.
    How many of the statements given above are correct?

    1. AOnly one
    2. BOnly two
    3. COnly three
    4. DAll four
24. 24.

    Which one of the following is not a part of the Liquidity Adjustment Facility (LAF) of the Reserve Bank of India?

    1. AStanding Deposit Facility
    2. BOutright open market operations
    3. CMarginal Standing Facility
    4. DTerm repo and reverse repo auctions
25. 25.

    With reference to legal tender in India, consider the following statements:
    1. Under the Coinage Act, 2011, a coin of one rupee or more is legal tender only for payments up to ₹1,000.
    2. A half-rupee coin is legal tender only for payments up to ₹10.
    3. A creditor may refuse to accept a banknote offered in settlement of a debt that has already been incurred, because legal tender status does not compel acceptance in any transaction.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B2 only
    3. C1 and 3 only
    4. D1 and 2 only

1. 1.

   UPSC 2026

   With reference to different Committees in India, consider the following details :

   Sl. No.	Committee	Objective	Organization under which it was formed
   1.	R.N. Malhotra Committee	Comprehensive reforms of Insurance sector in India	Insurance Regulatory and Development Authority of India
   2.	L.C. Gupta Committee	Preparing a roadmap for the introduction of derivatives trading in India	Securities and Exchange Board of India
   3.	Urjit R. Patel Committee	Preparing a roadmap for reforming bank lending to the Housing sector	Reserve Bank of India
   4.	Y.H. Malegam Committee	Preparing a roadmap for reforms in Microfinance sector in India	Reserve Bank of India

   In which of the above rows are all the details correctly matched ?

   1. A2 only
   2. B2 and 3
   3. C1, 3 and 4
   4. D2 and 4
2. 2.

   UPSC 2025

   Which of the following are the sources of income for the Reserve Bank of India?
   I. Buying and selling Government bonds
   II. Buying and selling foreign currency
   III. Pension fund management
   IV. Lending to private companies
   V. Printing and distributing currency notes
   Select the correct answer using the code given below.

   1. AI and II only
   2. BII, III and IV
   3. CI, III, IV and V
   4. DI, II and V
3. 3.

   UPSC 2024

   Consider the following statements :
   1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.
   2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs).
   3. In India, Stock Exchanges can offer separate trading platforms for debts.
   Which of the statements given above is/are correct ?

   1. A1 and 2 only
   2. B3 only
   3. C1, 2 and 3
   4. D2 and 3 only
4. 4.

   UPSC 2023

   Consider the following statements :
   Statement–I : In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
   Statement–II : Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
   Which one of the following is correct in respect of the above statements?

   1. ABoth Statement–I and Statement–II are correct and Statement–II is the correct explanation for Statement–I
   2. BBoth Statement–I and Statement–II are correct and Statement–II is not the correct explanation for Statement–I
   3. CStatement–I is correct but Statement–II is incorrect
   4. DStatement–I is incorrect but Statement–II is correct
5. 5.

   UPSC 2023

   Which one of the following activities of the Reserve Bank of India is considered to be part of 'sterilization'?

   1. AConducting 'Open Market Operations'
   2. BOversight of settlement and payment systems
   3. CDebt and cash management for the Central and State Governments
   4. DRegulating the functions of Non-banking Financial Institutions
6. 6.

   UPSC 2022

   With reference to the Indian economy, consider the following statements :
   1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
   2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
   3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
   Which of the statements given above are correct ?

   1. A1 and 2 only
   2. B2 and 3 only
   3. C1 and 3 only
   4. D1, 2 and 3
7. 7.

   UPSC 2022

   In India, which one of the following is responsible for maintaining price stability by controlling inflation ?

   1. ADepartment of Consumer Affairs
   2. BExpenditure Management Commission
   3. CFinancial Stability and Development Council
   4. DReserve Bank of India
8. 8.

   UPSC 2021

   Consider the following statements :
   1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
   2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
   3. The Governor of the RBI draws his power from the RBI Act.
   Which of the above statements are correct?

   1. A1 and 2 only
   2. B2 and 3 only
   3. C1 and 3 only
   4. D1, 2 and 3
9. 9.

   UPSC 2021

   The money multiplier in an economy increases with which one of the following?

   1. AIncrease in the Cash Reserve Ratio in the banks
   2. BIncrease in the Statutory Liquidity Ratio in the banks
   3. CIncrease in the banking habit of the people
   4. DIncrease in the population of the country
10. 10.

    UPSC 2021

    In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?
    1. Lending to trade and industry bodies when they fail to borrow from other sources
    2. Providing liquidity to the banks having a temporary crisis
    3. Lending to governments to finance budgetary deficits
    Select the correct answer using the code given below.

    1. A1 and 2
    2. B2 only
    3. C2 and 3
    4. D3 only
11. 11.

    UPSC 2020

    If you withdraw ₹ 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be

    1. Ato reduce it by ₹ 1,00,000
    2. Bto increase it by ₹ 1,00,000
    3. Cto increase it by more than ₹ 1,00,000
    4. Dto leave it unchanged
12. 12.

    UPSC 2020

    If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ?
    1. Cut and optimize the Statutory Liquidity Ratio
    2. Increase the Marginal Standing Facility Rate
    3. Cut the Bank Rate and Repo Rate
    Select the correct answer using the code given below :

    1. A1 and 2 only
    2. B2 only
    3. C1 and 3 only
    4. D1, 2 and 3
13. 13.

    UPSC 2019

    Which of the following is not included in the assets of a commercial bank in India?

    1. AAdvances
    2. BDeposits
    3. CInvestments
    4. DMoney at call and short notice
14. 14.

    UPSC 2019

    The money multiplier in an economy increases with which one of the following?

    1. AIncrease in the cash reserve ratio
    2. BIncrease in the banking habit of the population
    3. CIncrease in the statutory liquidity ratio
    4. DIncrease in the population of the country
15. 15.

    UPSC 2018

    Which one of the following statements correctly describes the meaning of legal tender money ?

    1. AThe money which is tendered in courts of law to defray the fee of legal cases
    2. BThe money which a creditor is under compulsion to accept in settlement of his claims
    3. CThe bank money in the form of cheques, drafts, bills of exchange, etc.
    4. DThe metallic money in circulation in a country
16. 16.

    UPSC 2017

    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 :

    1. A1 only
    2. B1 and 2 only
    3. C3 only
    4. D2 and 3 only
17. 17.

    UPSC 2015

    When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

    1. AIndia's GDP growth rate increases drastically
    2. BForeign Institutional Investors may bring more capital into our country
    3. CScheduled Commercial Banks may cut their lending rates
    4. DIt may drastically reduce the liquidity to the banking system
18. 18.

    UPSC 2015

    With reference to Indian economy, consider the following :
    1. Bank rate
    2. Open market operations
    3. Public debt
    4. Public revenue
    Which of the above is/are component/components of Monetary Policy?

    1. A1 only
    2. B2, 3 and 4
    3. C1 and 2
    4. D1, 3 and 4
19. 19.

    UPSC 2014

    The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to

    1. Abanking operations
    2. Bcommunication networking
    3. Cmilitary strategies
    4. Dsupply and demand of agricultural products
20. 20.

    UPSC 2014

    In the context of Indian economy, which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
    1. To enable the Central Bank to control the amount of advances the banks can create
    2. To make the people’s deposits with banks safe and liquid
    3. To prevent the commercial banks from making excessive profits
    4. To force the banks to have sufficient vault cash to meet their day-to-day requirements
    Select the correct answer using the code given below.

    1. A1 only
    2. B1 and 2 only
    3. C2 and 3 only
    4. D1, 2, 3 and 4
21. 21.

    UPSC 2014

    If the interest rate is decreased in an economy, it will

    1. Adecrease the consumption expenditure in the economy
    2. Bincrease the tax collection of the Government
    3. Cincrease the investment expenditure in the economy
    4. Dincrease the total savings in the economy
22. 22.

    UPSC 2013

    The Reserve Bank of India regulates the commercial banks in matters of
    1. Liquidity of assets
    2. Branch expansion
    3. Merger of banks
    4. Winding-up of banks
    Select the correct answer using the codes given below.

    1. A1 and 4 only
    2. B2, 3 and 4 only
    3. C1, 2 and 3 only
    4. D1, 2, 3 and 4
23. 23.

    UPSC 2013

    An increase in the Bank Rate generally indicates that the

    1. Amarket rate of interest is likely to fall
    2. BCentral Bank is no longer making loans to commercial banks
    3. CCentral Bank is following an easy-money policy
    4. DCentral Bank is following a tight-money policy
24. 24.

    UPSC 2013

    Consider the following liquid assets:
    1. Demand deposits with the banks
    2. Time deposits with the banks
    3. Savings deposits with the banks
    4. Currency The correct sequence of these assets in the decreasing order of liquidity is

    1. A1–4–3–2
    2. B4–3–2–1
    3. C2–3–1–4
    4. D4–1–3–2
25. 25.

    UPSC 2013

    In the context of Indian economy, ‘Open Market Operations’ refers to

    1. Aborrowing by scheduled banks from the RBI
    2. Blending by commercial banks to industry and trade
    3. Cpurchase and sale of government securities by the RBI
    4. DNone of the above
26. 26.

    UPSC 2013

    Supply of money remaining the same when there is an increase in demand for money, there will be

    1. Aa fall in the level of prices
    2. Ban increase in the rate of interest
    3. Ca decrease in the rate of interest
    4. Dan increase in the level of income and employment
27. 27.

    UPSC 2012

    The Reserve Bank of India (RBI) acts as a bankers' bank. This would imply which of the following?
    1. Other banks retain their deposits with the RBI.
    2. The RBI lends funds to the commercial banks in times of need.
    3. The RBI advises the commercial banks on monetary matters.
    Select the correct answer using the codes given below :

    1. A2 and 3 only
    2. B1 and 2 only
    3. C1 and 3 only
    4. D1, 2 and 3
28. 28.

    UPSC 2012

    Which of the following measures would result in an increase in the money supply in the economy?
    1. Purchase of government securities from the public by the Central Bank
    2. Deposit of currency in commercial banks by the public
    3. Borrowing by the government from the Central Bank
    4. Sale of government securities to the public by the Central Bank
    Select the correct answer using the codes given below :

    1. A1 only
    2. B2 and 4 only
    3. C1 and 3
    4. D2, 3 and 4
29. 29.

    UPSC 2011

    The lowering of Bank Rate by the Reserve Bank of India leads to

    1. AMore liquidity in the market
    2. BLess liquidity in the market
    3. CNo change in the liquidity in the market
    4. DMobilization of more deposits by commercial banks
30. 30.

    UPSC 2010

    Which of the following terms indicates a mechanism used by commercial banks for providing credit to the government ?

    1. ACash Credit Ratio
    2. BDebt Service Obligation
    3. CLiquidity Adjustment Facility
    4. DStatutory Liquidity Ratio
31. 31.

    UPSC 2010

    When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?

    1. AThe commercial banks will have less money to lend
    2. BThe Reserve Bank of India will have less money to lend
    3. CThe Union Government will have less money to lend
    4. DThe commercial banks will have more money to lend
32. 32.

    UPSC 2007

    Consider the following statements:
    1. The repo rate is the rate at which other banks borrow from the Reserve Bank of India.
    2. A value of 1 for the Gini Coefficient in a country implies that there is perfectly equal income for everyone in its population.
    Which of the statements given above is/are correct?

    1. A1 only
    2. B2 only
    3. CBoth 1 and 2
    4. DNeither 1 nor 2
33. 33.

    UPSC 2004

    Consider the following statements:
    1. Reserve Bank of India was nationalized on 26 January 1950.
    2. The borrowing programme of the Government of India is handled by the Department of Expenditure, Ministry of Finance.
    Which of these statements given above is/are correct?

    1. A1 only
    2. B2 only
    3. CBoth 1 and 2
    4. DNeither 1 nor 2
34. 34.

    UPSC 2002

    Consider the following:
    1. Currency with the public
    2. Demand deposits with banks
    3. Time deposits with banks
    Which of these are included in Broad Money (M3) in India?

    1. A1 and 2
    2. B1 and 3
    3. C2 and 3
    4. D1, 2 and 3
35. 35.

    UPSC 2001

    Consider the following statements regarding Reserve Bank of India:
    I. It is a banker to the Central Government.
    II. It formulates and administers monetary policy.
    III. It acts as an agent of the Government in respect of India’s membership of IMF.
    IV. It handles the borrowing programme of Government of India.
    Which of these statements are correct?

    1. AI and II
    2. BII, III and IV
    3. CI, II, III and IV
    4. DIII and IV
36. 36.

    UPSC 1998

    The banks are required to maintain a certain ratio between their cash in hand and total assets. This is called

    1. ASBR (Statutory Bank Ratio)
    2. BSLR (Statutory Liquid Ratio)
    3. CCBR (Central Bank Reserve)
    4. DCLR (Central Liquid Reserve)
37. 37.

    UPSC 1998

    The accounting year of the Reserve Bank of India is

    1. AApril – March
    2. BJuly – June
    3. COctober – September
    4. DJanuary – December
38. 38.

    UPSC 1997

    The sum of which of the following constitutes Broad Money in India?
    I. Currency with the Public
    II. Demand deposits with banks
    III. Time deposits with banks
    IV. Other deposits with RBI Choose the correct answer using the codes given below:

    1. AI and II
    2. BI, II and III
    3. CI, II, III and IV
    4. DI, II and IV
39. 39.

    UPSC 1995

    Which one of the following is not an instrument of selective credit control in India?

    1. ARegulation of consumer credit
    2. BRationing of credit
    3. CMargin requirements
    4. DVariable reserve ratios
40. 40.

    UPSC 1995

    Bank Rate implies the rate of interest

    1. Apaid by the Reserve Bank of India on the deposits of Commercial Banks
    2. Bcharged by Banks on loans and advances
    3. Cpayable on Bonds
    4. Dat which the Reserve Bank of India discounts the Bills of Exchange