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I. Executive Summary
The Reserve Bank of India (RBI) functions as India's central bank and is the cornerstone of
its financial system. Established in 1935, the RBI transitioned from a
privately owned entity to a fully government-owned institution in 1949. Its
foundational mandate, as enshrined in the Reserve Bank of India Act, 1934, is
to maintain monetary stability and manage the nation's currency and credit
systems. This dual objective has evolved over time to encompass promoting price
stability while supporting economic growth.
The RBI’s operational framework is built on a multi-faceted approach to its core
functions: acting as the monetary authority, regulating and supervising the
financial system, managing foreign exchange, and issuing currency. A key
feature of its modern governance is the Monetary Policy Committee (MPC), a
six-member body responsible for setting the benchmark policy rate. Recent
strategic initiatives, such as the creation of the Regulatory Review Cell (RRC)
and the Payments Regulatory Board (PRB), demonstrate the RBI’s commitment to
modernizing its oversight of a rapidly changing and complex economy,
particularly in the digital payments sector.
A central theme in the RBI’s history is its relationship with the Government of India, a
dynamic and often contentious balance between institutional autonomy and
democratic accountability. While the RBI's independence is a deeply held
principle, it remains legally subordinate to the government, as seen in the
rare invocation of Section 7 of the RBI Act. The RBI's ability to navigate this
relationship, coupled with its strategic adaptation to new financial
technologies and global economic pressures, will continue to be a defining
factor in shaping India's economic and financial trajectory.
II. Foundational Principles and Historical Context
2.1
Genesis and Mandate
The Reserve Bank of India was formally established on April 1, 1935, in accordance with the
provisions of the Reserve Bank of India Act, 1934.
The conceptual underpinnings for the central bank were derived from the
strategies outlined by Dr. B.R. Ambedkar in his seminal work,
The Problem of the Rupee – Its Origin & Its Solution. This vision was further crystallized by the recommendations of the Royal Commission on Indian Currency & Finance, more popularly known as the Hilton Young Commission, which advocated for the creation of a central banking institution.
Initially, the
Central Office was established in Kolkata, but it was permanently relocated to
Mumbai in 1937, a move that placed the institution at the heart of India’s
financial capital.
While the RBI was originally a privately owned entity, its ownership was
transferred to the Government of India following nationalization in 1949. This
transition from private to public ownership cemented its role as a state-owned
institution with a core public-interest mandate.
The Preamble to
the Reserve Bank of India Act, 1934, outlines the fundamental functions of the
institution. These include "to regulate the issue of Bank notes and
keeping of reserves with a view to securing monetary stability in India"
and "to operate the currency and credit system of the country to its
advantage".
Over time, this mandate was updated to include "a modern monetary policy
framework to meet the challenge of an increasingly complex economy".
This expansion of its mission reflects the central bank's evolving role in a
dynamic macroeconomic environment.
2.2
The Reserve Bank of India Act, 1934
The Reserve
Bank of India Act, 1934, is the legislative cornerstone that provides the legal
and operational framework for the RBI's existence and functions.
This Act, in conjunction with the Banking Regulation Act, 1949, forms the
bedrock of India's banking and financial regulatory architecture.
Several key
provisions within the Act define the RBI's statutory powers and
responsibilities:
·
Section 7: This is arguably the most scrutinized provision of the Act. It
grants the central government the authority to issue directions to the RBI
"as it may consider necessary in the public interest".
This power, while only used once in the history of the institution, legally
places the central bank's autonomy in a precarious position. The existence of
this clause is a constant source of tension and discussion, as it gives the
executive branch a powerful, albeit rarely exercised, tool to influence the
central bank's operations.
·
Section 17: This section delineates the types of business the RBI is
authorized to conduct, such as accepting deposits from central and state
governments, purchasing and discounting bills of exchange, and providing loans
to banks and state financial corporations.
·
Section 21: This provision mandates that the RBI must manage the banking
affairs and public debt for the central government.
·
Section 22: This clause grants the RBI the exclusive right to issue and
circulate currency notes throughout India. It is a defining feature of its
central bank status.
·
Section 24: This section empowers the RBI to recommend the denominational
values of notes and their discontinuance. The maximum note denomination is set
at 10,000.
·
Section 26: This provision describes the legal tender character of Indian
bank notes and gives the central government the power to declare any series of
notes to cease to be legal tender, based on the RBI’s recommendation.
·
Section 42(1): This critical section of the Act mandates that all
"scheduled banks" must maintain an average daily balance with the
RBI. This deposit amount is a specified percentage of its net demand and time
liabilities in India and is a cornerstone for the implementation of the Cash
Reserve Ratio (CRR) monetary policy tool.
III. Governance and Organizational Framework
3.1
The Central Board of Directors
The highest
decision-making and directional authority of the Reserve Bank of India is
vested in a 21-member Central Board of Directors.
This board provides the overall strategic guidance for the institution,
formulating policies and overseeing its various functions.
The composition
of the Central Board is a mix of RBI insiders, government representatives, and
other experts, a structure designed to ensure broad-based oversight. It
includes:
·
The Governor of the RBI.
·
Four Deputy Governors.
·
Two representatives from the Ministry of Finance, typically the
Economic Affairs Secretary and the Financial Services Secretary.
·
Ten directors who are nominated by the Government of India.
·
Four directors who represent the interests of the Local Boards
of the RBI.
The current
Governor of the RBI is Sanjay Malhotra, and he is supported by four Deputy
Governors: Swaminathan J, M. Rajeshwar Rao, Michael Patra, and T. Rabi Shankar.
This board structure formally incorporates government input into the central
bank's governance, reflecting the shared responsibility for macroeconomic
policy.
3.2
The Monetary Policy Committee (MPC)
The Monetary
Policy Committee (MPC) is a specialized six-member body constituted under
Section 45ZB of the RBI Act, 1934.
Its establishment in 2016 was a significant institutional reform, shifting the
power to set policy rates from a single person—the Governor—to a more
collaborative committee.
The primary mandate of the MPC is to achieve the inflation target set by the
government, which is to maintain the Consumer Price Index (CPI) between a 2%
and 6% tolerance band, with a target of 4%.
The committee's
composition is carefully balanced between internal RBI expertise and external
perspectives:
·
The RBI Governor, who serves as the ex-officio chairperson.
·
The Deputy Governor in charge of monetary affairs, who is also
an ex-officio member.
·
One other RBI officer nominated by the Central Board, as an
ex-officio member.
·
Three external members nominated by the central government, each
serving a four-year term.
Decisions are
made by a majority vote, with each member having one vote. In the event of a
tie, the Governor has a second, or casting, vote to break the deadlock.
The MPC is required to meet at least four times a year, and the minutes of its
meetings, including the rationale for each member's vote, are publicly
disclosed.
This institutional framework for transparent and accountable decision-making is
a critical aspect of modern central banking.
A notable
feature of this framework is the accountability mechanism it establishes. If
the RBI fails to maintain the inflation target for three consecutive quarters
(i.e., if average inflation is either above 6% or below 2% for that period), it
is mandated to submit a report to the central government.
This report must specify the reasons for the failure, the remedial actions
proposed by the RBI, and an estimation of the time it will take to return to
the inflation target.
This formal process provides a clear link between institutional independence
and public accountability.
IV. Core Functions of the Reserve Bank of India
The RBI’s
mission extends beyond its role as a monetary authority to encompass a wide
array of functions essential for the stability and development of the Indian
economy.
4.1
Monetary Authority
The RBI’s
function as the monetary authority is its most recognized role. It is tasked
with formulating, implementing, and monitoring the nation’s monetary policy.
The core objective of this policy is to maintain price stability, thereby
controlling inflation, while simultaneously supporting the objective of
economic growth.
The RBI manages the money supply and credit in the economy through a variety of
quantitative and qualitative measures, which are detailed in a later section.
This function is critical for ensuring a stable macroeconomic environment
conducive to sustainable development.
4.2
Financial System Regulation and Supervision
The RBI acts as
the primary regulator and supervisor of India’s financial system.
Its objective is to maintain public confidence in the banking and financial
system, protect the interests of depositors, and ensure the provision of
cost-effective banking services.
To fulfill this
mandate, the RBI has established the Board for Financial Supervision (BFS), a
committee of its Central Board of Directors.
The BFS was created in 1994 to provide a concentrated focus on supervisory
policy and skills and exercises integrated supervision over commercial banks,
financial institutions, and non-banking financial intermediaries.
The regulatory
framework is designed to mitigate systemic risks and includes:
·
Prudential Norms: The RBI sets standards for capital adequacy, asset quality, and
risk management that all financial institutions must adhere to. This prevents
excessive risk-taking and strengthens the overall resilience of the financial
system.
·
Oversight and Surveillance: The RBI conducts regular on-site
inspections, off-site surveillance, and data analysis to monitor the financial
health of institutions.
It also utilizes stress tests to assess the resilience of banks under adverse
economic conditions.
The publication of Financial Stability Reports (FSRs) contributes to public
awareness and reinforces confidence in the system.
·
Consumer Protection: Beyond institutional regulation, the RBI is also instrumental
in promoting financial literacy, enhancing the accessibility of financial
services, and safeguarding consumer interests.
4.3
Currency Management
The RBI holds
the exclusive right to issue currency notes in India.
This function is managed through a dedicated Issue Department, which is
separate from the Banking Department.
The central bank's objective is to ensure the public has access to an adequate
supply of currency notes and coins, and that this currency is of good quality.
This role also involves the exchange and destruction of notes and the putting
into circulation of coins minted by the Government of India.
The legal tender status of a note is described in Section 26 of the RBI Act,
1934, and the maximum denomination of a note is 10,000.
4.4
Foreign Exchange Management
The RBI is
entrusted with the management of the Foreign Exchange Management Act (FEMA),
1999.
This responsibility is aimed at facilitating external trade and payments and
promoting the orderly development and maintenance of the foreign exchange
market in India.
As part of this function, the central bank is tasked with managing foreign
exchange rates by buying and selling foreign currencies in the Forex market to
manage demand and maintain stability.
V. Analysis of Monetary Policy Tools and Their Economic Impact
5.1
Key Tools of Monetary Policy
The RBI employs
a range of instruments to manage money supply and influence macroeconomic
conditions. These tools are broadly categorized as quantitative, which affect
the total volume of credit, and qualitative, which influence the direction of
credit. The most critical quantitative tools include the Repo Rate, the Reverse
Repo Rate, and the Cash Reserve Ratio (CRR).
·
Repo Rate: The repo rate is the interest rate at which the RBI lends money
to commercial banks, typically to address their short-term liquidity needs. It
represents the borrowing cost for banks from the central bank.
A higher repo rate makes borrowing more expensive for banks, which discourages
them from borrowing and in turn, leads them to increase their lending rates for
customers. This cools down economic activity and helps control inflation.
Conversely, a lower repo rate makes borrowing cheaper for banks, which can lead
them to reduce their loan interest rates, stimulating spending and economic
growth.
The repo rate is a key lever for the RBI to manage inflation and borrowing
costs.
·
Reverse Repo Rate: The reverse repo rate is the interest rate at which the RBI
borrows money from commercial banks.
When banks have surplus funds, they can park this money with the RBI and earn
interest at this rate. The RBI uses this tool to absorb excess liquidity from
the banking system and to manage inflation.
A higher reverse repo rate incentivizes banks to lend their surplus cash to the
RBI rather than to the public, which helps curb excess liquidity in the economy.
·
Cash Reserve Ratio (CRR): The CRR is the percentage of a bank's total
deposits that it must hold as reserves with the RBI. This ratio is a regulatory
requirement and does not earn interest for the bank.
By changing the CRR, the RBI directly influences the amount of money banks have
available to lend. An increase in the CRR reduces the lendable funds in the
banking system, while a decrease makes more funds available for lending.
Table 1: Key
Differences: Repo Rate vs. Reverse Repo Rate
|
Factor
|
Repo Rate
|
Reverse Repo Rate
|
|
Meaning
|
Rate at which RBI lends money to banks
|
Rate at which RBI borrows money from banks
|
|
Who Borrows?
|
Banks borrow from RBI
|
RBI borrows from banks
|
|
Impact on Economy
|
Higher repo rate leads to costlier loans, which
slows spending
|
Higher reverse repo rate encourages banks to park
more money with the RBI, which slows lending
|
|
Purpose
|
To control inflation and manage borrowing costs
|
To absorb excess liquidity and control inflation
|
|
Effect on People
|
Directly affects loan EMIs and interest rates
|
Affects how much money banks are willing to lend
|
5.2
Transmission Mechanisms
The RBI's
monetary policy decisions are not isolated actions; they are designed to be
transmitted throughout the economy through various channels. When the MPC
changes the benchmark policy rate, this change first impacts the borrowing
costs of commercial banks.
Banks, in turn, adjust their own lending and deposit rates to reflect the new
policy rate.
For
individuals, a change in the repo rate directly affects borrowing costs. For
instance, a decrease in the repo rate can lower the interest rates on home,
personal, and vehicle loans, leading to reduced Equated Monthly Instalments
(EMIs) for borrowers.
This makes credit more affordable, which can spur consumer spending and
investment. On the other hand, an increase in the repo rate raises the cost of
borrowing, which discourages new loans and helps to curb inflation.
The policy
decisions also impact savings. A higher repo rate can lead to an increase in
fixed deposit (FD) rates offered by banks, making savings more attractive for
individuals and retirees.
The ultimate
goal of this transmission mechanism is to influence aggregate demand, which in
turn impacts inflation and economic growth.
Lower rates lead to more borrowing and spending, which boosts demand and can
lead to more production and jobs. This can improve GDP numbers. However, there
are significant challenges to this process. The effects of a rate change are
not instantaneous; there is a time lag that can take anywhere from six to
twelve months to fully manifest in the economy.
Furthermore, the transmission is not always complete, as commercial banks may
not pass on the full policy rate changes to their customers, which can blunt
the intended effect of the policy.
5.3
Recent Policy Decisions and Outlook
Following a
period of aggressive rate hikes in 2022 and 2023 to combat surging global
inflation, the RBI signaled a pause in its rate-tightening cycle.
With inflation now trending downward, a majority of economists and financial
market participants are advocating for a rate cut.
Reports from
institutions like the State Bank of India (SBI) and Morgan Stanley have
projected a 25 basis point (bps) cut in the upcoming September/October 2025
Monetary Policy Committee meeting, with some anticipating further cuts later in
the year.
This expectation is driven by several factors:
·
Benign Inflation: Retail inflation has been tracking below the RBI’s 4% target
for several consecutive months.
Projections suggest that inflation will remain benign, with some forecasts
placing the Consumer Price Index (CPI) as low as 1.1% in October if a Goods and
Services Tax (GST) rationalization is factored in.
·
Strong Economic Growth: Despite lower inflation, economic growth has remained robust,
with real GDP growing better than expected.
·
Risk of "Type 2 Error": The SBI report cautions
that failing to cut rates, given the favorable conditions, would constitute a
"Type 2 error," which is the risk of not taking a positive action
despite evidence that supports it. This could stifle economic growth unnecessarily.
The MPC's next
meeting is scheduled for September 29–30, 2025, with the policy decision to be
announced on October 1, 2025.
The RBI’s policy stance will require careful communication to manage market
expectations and ensure a smooth transition to a potential easing cycle.
Table 2:
Historical Repo Rate Updates (2016-2025)
|
Date
|
Repo Rate (%)
|
...source
|
6.25
|
|
05-Apr-2016
|
6.50
|
|
|
Note:
Data from sources
VI. The Financial Sector: Supervision, Stability, and Recent
Regulatory Shifts
6.1
Systemic Stability and Risk Management
The RBI's role
as a supervisor extends to ensuring the overall stability and health of the
financial system. This is achieved through a multi-faceted approach to risk
management and the establishment of robust prudential norms. The central bank
mandates that financial institutions adhere to minimum standards for capital
adequacy and risk management practices.
This includes asset quality norms, such as the classification of assets and
provisioning for potential losses from non-performing assets (NPAs).
These measures are designed to ensure that banks can absorb potential losses
and meet their obligations to depositors, thereby preventing a systemic failure.
In addition to
regulatory mandates, the RBI proactively monitors the financial system through
off-site surveillance and the publication of Financial Stability Reports (FSRs).
These reports provide a comprehensive assessment of risks and vulnerabilities,
enhancing transparency and building trust among market participants and the
public. During times of financial stress, the RBI can also provide liquidity
support to banks to ensure they can meet their short-term obligations.
Recent legislative measures, such as the Banking Regulation (Amendment) Act,
2020, have also strengthened the RBI's supervisory powers, particularly over
cooperative banks, a sector that has historically posed governance challenges.
6.2
The New Regulatory Review Mechanism
Recognizing
that regulations must evolve with the dynamic financial landscape, the RBI has
institutionalized a new, permanent review mechanism. In September 2025, the
central bank established a Regulatory Review Cell (RRC) within its Department
of Regulation.
This is a significant move away from the previous ad-hoc, circular-based
updates and towards a more structured approach.
The RRC's mandate is to ensure that all regulations issued by the RBI are
subjected to a comprehensive and systematic internal review every five to seven
years.
This proactive process is designed to align regulatory language and content
with evolving market and policy dynamics, making the framework more
contemporary and responsive.
Concurrently,
the RBI has formed an independent Advisory Group on Regulation (AGR) to act as
a crucial channel for industry feedback.
The AGR, chaired by State Bank of India Managing Director Rana Ashutosh Kumar
Singh, is composed of external experts from across the banking and financial
services industry.
The formation of this group provides a formal and stable window for regulated
entities to communicate with the central bank. Previously, there was little
recourse for banks to flag redundant or conflicting regulations. The AGR, with
an initial three-year tenure, institutionalizes a feedback loop that enhances
collaboration and ensures the regulatory framework remains relevant and
effective.
This new mechanism reflects a fundamental shift in the RBI's regulatory
philosophy, moving toward a responsive architecture that keeps pace with market
changes and fosters greater stakeholder trust.
6.3
The Digital Payments Revolution
India's digital
payments ecosystem has grown at an explosive pace, and the RBI has responded
with a robust regulatory framework to manage its complexity and risks. The
central bank has announced the creation of a new Payments Regulatory Board
(PRB) to replace the existing Board for Regulation and Supervision of Payment
and Settlement Systems (BPSS).
This new six-member board, which will be chaired by the RBI Governor, is
designed to enhance oversight and ensure uniformity in policy implementation.
The PRB’s
composition, with a balance of three members from the RBI and three nominated
by the central government, is a notable feature.
This structure formalizes the collaboration between the central bank and the
government in regulating critical digital infrastructure like UPI and other
payment systems. This approach avoids fragmentation of oversight and brings
both policy and operational expertise to the decision-making table, which can
lead to more informed and inclusive regulations.
In addition to
establishing the PRB, the RBI has issued new master directions that tighten its
control over payment aggregators (PAs) and other fintechs.
A key directive is the mandatory requirement for PAs to conduct full Know Your
Client (KYC) checks on their merchants.
While this has caused short-term operational challenges and increased expenses
for some fintechs, it is a decisive move to strengthen fraud prevention and
ensure regulatory compliance.
These new regulations also halted some services, such as rent payments via
credit cards, by requiring them to be routed through a separate channel like
BBPS.
The RBI’s actions signal a clear intent to ensure the safety and integrity of
the digital payments ecosystem, even at the cost of some immediate business
inconvenience for a sector known for its rapid, often less-regulated, growth.
VII. The Debate on Autonomy: A Critical Relationship
7.1
Legal and Philosophical Underpinnings
The debate over
the Reserve Bank of India’s autonomy is a long-standing and critical one. While
the Reserve Bank of India Act, 1934, does not explicitly use the word
"autonomous," the principle of central bank independence has become a
deeply entrenched and widely accepted norm over the years.
This principle is not unique to India; it is a global standard for central
banking.
The economic
rationale behind central bank independence is well-established. It is believed
that an independent central bank is better positioned to maintain long-term
price stability and manage inflation, as it can make decisions based on
objective economic data rather than short-term political interests.
Political interference, which often focuses on short-term growth and electoral
cycles, can undermine the central bank’s credibility and lead to higher
inflation and economic instability.
The legal frameworks of many central banks worldwide are designed to shield
them from such political pressures.
However, the
concept of a completely unaccountable institution in a democratic system
presents its own challenges. The RBI, while acting independently on monetary
policy, coordinates with the Ministry of Finance on major economic policies. A
balance must be struck between the central bank's operational independence and
its democratic accountability.
7.2
Historical and Recent Tensions
The relationship between the RBI and the Government of India has been characterized
by both cooperation and conflict. While they have generally respected each
other's jurisdiction, there have been periods of intense disagreement, with
reports of governors resigning or being forced to step down.
The most prominent case study of this tension in recent history is the 2016
demonetization of high-value currency notes.
While the government claimed the decision was based on a recommendation from
the RBI, one source suggests an unusual role reversal where the central
government directed the RBI to recommend the policy.
The RBI was criticized for its lack of preparedness for the fallout, including
a shortage of lower-denomination notes and logistical issues with new currency
fitting into ATMs.
Furthermore, the Monetary Policy Committee (MPC) was entirely excluded from the
decision-making process, even though managing the money supply is a core aspect
of monetary policy.
More recent events continue to highlight the political pressures the RBI faces. The
controversy surrounding the sale of a land plot at Nariman Point to the RBI for
₹3,472 crore brought the central bank's actions into a political dispute over
land value and alleged financial loss to the public exchequer.
Such events demonstrate that the RBI's actions, even when seemingly routine,
can become politicized and subject to public scrutiny, which can impact its
perceived independence.
The core of the autonomy debate is not just about specific policy decisions; it is a
fundamental discussion about the locus of economic power. A truly independent
central bank can decline a government’s request, which creates a natural
tension in a democracy where elected officials are accountable to the
electorate. The presence of Section 7 of the RBI Act, and its one-time
invocation, reinforces the fact that while the RBI operates with a high degree
of independence, it is ultimately a creature of the legislature and a component
of the state's apparatus.
VIII. Conclusion and Strategic Recommendations
The Reserve Bank of India is a multi-faceted and complex institution that serves as the
bedrock of India's financial and monetary systems. Its journey from a privately
owned entity to a fully nationalized central bank has been marked by a constant
evolution of its mandate, from a narrow focus on monetary stability to a broad
responsibility for financial regulation, foreign exchange management, and
economic development.
The RBI’s institutional maturity is evident in its continuous efforts to enhance its
governance and regulatory frameworks. The establishment of the Monetary Policy
Committee formalized a transparent, collective approach to monetary policy, and
the creation of new bodies like the Regulatory Review Cell and the Payments
Regulatory Board reflects a proactive strategic vision to remain agile and
relevant in a dynamic global and domestic economy. These institutional reforms,
particularly in the digital payments and fintech sectors, demonstrate the RBI's
commitment to building a more responsive and robust regulatory architecture.
The central bank's future success will be defined by its ability to navigate the delicate
and persistent debate on its autonomy. While the RBI's independence is a vital
component of its credibility and its ability to maintain price stability, it
must also operate within a democratic framework that demands accountability.
The long-standing, and at times contentious, relationship with the Government
of India is a testament to this ongoing tension. The RBI's capacity to maintain
a principled stance on sound monetary and regulatory policy, while engaging in
constructive dialogue with the government, will be paramount in ensuring
continued financial stability and sustainable economic growth for India. The
institution's ability to balance its technical expertise with the broader
political and social realities of the nation will be the most significant
challenge and opportunity for the years to come.
UPSC-Level Quiz on the Reserve Bank of India
Question 1:
With respect to the Reserve Bank of India’s organizational structure, consider the following statements:
The Central Board of Directors of the RBI consists of 21 members.
The Central Board includes the Governor, four Deputy Governors, and ten members nominated by the Central Government.
The Board for Financial Supervision (BFS) is a separate body and is not a committee of the Central Board.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer: (a) 1 and 2 only
Explanation:
Statement 1 is correct: The overall direction of the RBI is vested in a 21-member Central Board of Directors.
Statement 2 is correct: The composition of the board includes the Governor, four Deputy Governors, and ten government-nominated directors.
Statement 3 is incorrect: The Board for Financial Supervision (BFS) was constituted in November 1994 as a committee of the Central Board of Directors of the RBI.
Question 2:
With reference to the core functions of the RBI, consider the following statements:
The RBI is the sole authority for issuing currency notes and coins in India.
The maximum note denomination the RBI can issue is set at ₹10,000.
The RBI is not responsible for the destruction of currency notes that are not fit for circulation.
Which of the statements given above is/are incorrect?
(a) 1 and 2 only
(b) 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer: (b) 3 only
Explanation:
Statement 1 is incorrect: While the RBI has the sole right to issue and circulate currency notes, coins are minted by the Government of India and put into circulation by the RBI. The RBI is not the sole issuer of coins.
Statement 2 is correct: Section 24 of the RBI Act, 1934, sets the maximum note denomination at ₹10,000.
Statement 3 is incorrect: The RBI is responsible for issuing, exchanging, and destroying currency notes that are no longer fit for circulation.
Question 3:
In the context of the RBI’s monetary policy tools, which of the following statements correctly describes the relationship between the Repo Rate and the Reverse Repo Rate?
(a) Both rates are used to lend money to commercial banks.
(b) The Repo Rate is for banks lending to the RBI, while the Reverse Repo Rate is for the RBI lending to banks.
(c) A higher Repo Rate makes borrowing cheaper for banks, while a higher Reverse Repo Rate encourages banks to park more money with the RBI.
(d) A higher Repo Rate makes borrowing more expensive for banks, while a higher Reverse Repo Rate encourages banks to lend their surplus cash to the RBI.
Correct Answer: (d) A higher Repo Rate makes borrowing more expensive for banks, while a higher Reverse Repo Rate encourages banks to lend their surplus cash to the RBI.
Explanation:
The Repo Rate is the interest rate at which the RBI lends money to commercial banks. A higher repo rate increases the borrowing cost for banks.
The Reverse Repo Rate is the interest rate at which the RBI borrows money from commercial banks that have a surplus. A higher reverse repo rate incentivizes banks to lend their surplus cash to the RBI rather than to the public, which helps curb excess liquidity.
Question 4:
With reference to the recent reforms in RBI’s regulatory framework, consider the following statements:
The newly established Regulatory Review Cell (RRC) is mandated to review all RBI regulations every 5 to 7 years.
The Advisory Group on Regulation (AGR) has been created to channel industry feedback into the regulatory review process.
Rana Ashutosh Kumar Singh, the Managing Director of the State Bank of India, is the chairman of the AGR.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Correct Answer: (c) All three
Explanation:
Statement 1 is correct: The Regulatory Review Cell (RRC) was established with a mandate to ensure that all regulations issued by the RBI are subject to a comprehensive and systematic internal review every five to seven years.
Statement 2 is correct: The independent Advisory Group on Regulation (AGR) was formed to channel industry feedback into the periodic review of regulations.
Statement 3 is correct: The Advisory Group on Regulation (AGR) is chaired by State Bank of India Managing Director Rana Ashutosh Kumar Singh.
Question 5:
Which of the following statements regarding the Payments Regulatory Board (PRB) is/are correct?
It is a six-member body headed by the RBI Governor.
It replaces the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
The board is composed entirely of RBI members, with no representation from the Central Government.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Correct Answer: (b) 1 and 2 only
Explanation:
Statement 1 is correct: The PRB is a new six-member board headed by the RBI Governor.
Statement 2 is correct: The PRB was announced to replace the existing Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
Statement 3 is incorrect: The PRB’s composition is balanced, with three members from the RBI and three members nominated by the Central Government.
Question 6:
Consider the impact of the RBI’s recent policy actions on the economy. Which of the following is a potential consequence of a decrease in the Repo Rate?
(a) Higher interest rates on fixed deposits for retirees.
(b) Increased borrowing costs for commercial banks.
(c) Reduced Equated Monthly Instalments (EMIs) on home loans.
(d) A contraction of the money supply in the economy.
Correct Answer: (c) Reduced Equated Monthly Instalments (EMIs) on home loans.
Explanation:
When the RBI cuts the repo rate, it becomes cheaper for commercial banks to borrow money. This can lead to a reduction in lending rates for consumers, directly lowering the EMIs on loans such as home, personal, and vehicle loans.12 The other options describe effects of a rate hike or are incorrect.
Question 7:
With reference to the historical context of the Reserve Bank of India, which of the following statements are correct?
The RBI’s Central Office was originally established in Kolkata before being permanently moved to Mumbai.
The RBI transitioned from a privately owned entity to a fully government-owned institution after nationalization in 1949.
The concept for the RBI was derived from the recommendations of the Hilton Young Commission and the work of Dr. B.R. Ambedkar.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Correct Answer: (c) All three
Explanation:
Statement 1 is correct: The RBI's Central Office was initially established in Kolkata before its permanent relocation to Mumbai in 1937.
Statement 2 is correct: Although initially privately owned, the RBI was nationalized and became a fully government-owned institution in 1949.
Statement 3 is correct: The conceptual framework for the RBI was influenced by the recommendations of the Royal Commission on Indian Currency & Finance (Hilton Young Commission) and the strategies of Dr. B.R. Ambedkar.
Question 8:
Which of the following provisions of the Reserve Bank of India Act, 1934, grants the RBI the exclusive right to issue currency notes throughout India?
(a) Section 7
(b) Section 17
(c) Section 22
(d) Section 26
Correct Answer: (c) Section 22
Explanation:
Section 22 of the RBI Act, 1934, grants the RBI the sole right to issue and circulate currency notes in India. The other sections listed deal with different functions: Section 7 on the government’s power to give directions to the RBI , Section 17 on the types of business the RBI is authorized to conduct, and Section 26 on the legal tender character of bank notes and the government's power to declare a series of notes invalid based on RBI recommendation.
Question 9:
Consider the debate on the autonomy of the RBI. Which of the following factors are considered arguments for granting the central bank independence?
An independent central bank can make decisions based on objective economic data rather than short-term political interests.
Independence helps maintain long-term price stability and manage inflation.
The lack of independence has been linked to financial instability in many countries.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer: (d) 1, 2 and 3
Explanation:
Statement 1 is correct: An independent central bank is believed to be better positioned to make decisions based on objective economic data rather than short-term political interests.
Statement 2 is correct: Economists globally have argued that central bank independence is a cornerstone for a country to keep its inflation in check and stable.
Statement 3 is correct: The research notes that a lack of independence has worsened financial stability in many countries.
Question 10:
With reference to the RBI's new master directions for payment aggregators (PAs), which of the following statements is/are correct?
PAs are now required to conduct full Know Your Client (KYC) checks on their merchants.
Rent payments via credit cards have been halted and must now be routed through a separate channel like BBPS.
These new regulations were established to enhance fraud prevention and ensure regulatory compliance.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Correct Answer: (c) All three
Explanation:
Statement 1 is correct: The RBI's new master directions mandate that PAs must undertake full KYC checks on their customers and merchants.
Statement 2 is correct: The research notes that the RBI's new directive has halted rent payments via credit cards and requires them to be routed through channels like BBPS.
Statement 3 is correct: The directives are a decisive move to strengthen fraud prevention, ensure regulatory compliance, and enhance oversight in the digital payments ecosystem.
