Functions of the RBI: Monetary Policy and Tools

The correct answer is C, 1949. The Reserve Bank of India began as a shareholders' bank and was taken into public ownership on 1 January 1949 under the Reserve Bank (Transfer to Public Ownership) Act, 1948. Since then the entire capital has been held by the Government of India, although the Bank continues to be run by a Central Board under its own Act of 1934.

Option A, 1971, is the year in which the Bank's insurance related subsidiary work expanded and is close to the 1969 bank nationalisation, so it is placed to confuse. Option B, 1956, is the year the Imperial Bank of India became the State Bank of India, which candidates often mix up with this event. Option D, 1935, is the year the Reserve Bank began operations, on 1 April, under the Act of 1934, and is the commonest wrong answer of the four.

The correct answer is B, 1934. The Reserve Bank of India Act, 1934 is the statute that created the Bank and it carries the provisions on the custody and deployment of the country's foreign exchange reserves, which the Bank holds and invests. The day to day dealings of residents in foreign exchange are separately governed by the Foreign Exchange Management Act, 1999, which replaced the older regulation Act of 1973, but the Bank's own reserve management powers flow from its founding Act.

Option A, 1947, is the year of independence and of the earlier foreign exchange regulation law, which makes it tempting. Option C, 1923, is simply too early, as the Hilton Young Commission that recommended the Bank reported only in 1926. Option D, 1971, matches no relevant statute of the Reserve Bank.

The correct answer is D, Reserve Bank of India. Policy rates are announced by the Reserve Bank, and since 2016 the decision is taken by its Monetary Policy Committee of six members under the chairmanship of the Governor. The repo rate is the rate at which banks borrow short term funds from the Bank against government securities, and the reverse repo is the rate at which the Bank absorbs their surplus funds, so both are instruments of the central bank and not of any other body.

Option A, the Ministry of Finance, sets the inflation target in consultation with the Bank and appoints three members of the Committee, but it does not fix the rates. Option B, the State Bank of India, is a commercial bank that borrows at these rates. Option C, the Comptroller and Auditor General, audits government accounts and has no role in monetary policy at all.

The correct answer is A, 1 April 1935. The Reserve Bank of India Act was passed in 1934 and the Bank began work on the first day of April in the following year, with its central office at Calcutta. It was set up as a shareholders' bank on the recommendation of the Hilton Young Commission, and its first Governor was Sir Osborne Smith.

Option B, 1 July 1955, is the day the Imperial Bank of India was reconstituted as the State Bank of India. Option C, 1 January 1949, is the day the Reserve Bank was nationalised, which is a different milestone. Option D, 1 April 1934, mixes the date of commencement with the year of the Act and is the trap that catches candidates who remember the numbers but not which belongs to which.

The correct answer is A, Hilton Young Commission. Formally the Royal Commission on Indian Currency and Finance, it reported in 1926 and recommended that the currency and credit functions then divided between the Government and the Imperial Bank be placed in a single central bank. Its recommendation led to the Reserve Bank of India Act, 1934 and to the opening of the Bank in 1935.

Option B, the Narasimham Committee, reported in 1991 and 1998 on banking sector reform, prudential norms and consolidation, long after the Bank existed. Option C, the Fazl Ali Commission, was the States Reorganisation Commission of 1955 and belongs to polity, not banking. Option D, the Sarkaria Commission, examined Centre State relations in the nineteen eighties. Only the first is a currency and finance body.

The correct answer is B, Sir Osborne Smith. He was the first Governor of the Reserve Bank, taking charge when the Bank opened in 1935, and he had earlier been a managing governor of the Imperial Bank of India. He left before completing his term after differences with the Government over exchange rate and interest rate policy.

Option A, C. D. Deshmukh, was the first Indian Governor of the Bank and later became Union Finance Minister, which is why he is the most attractive wrong answer here. Option C, Sir James Taylor, was the second Governor and the one under whom the central office moved to Bombay in 1937. Option D, Benegal Rama Rau, served the longest term as Governor and resigned after a disagreement with the Finance Minister. Read the question carefully: the first Governor and the first Indian Governor are different people.

The correct answer is C, one rupee note. The one rupee note is issued by the Government of India through the Ministry of Finance and carries the signature of the Finance Secretary, not of the Governor. All coins are likewise issued by the Government. The Reserve Bank, under Section 22 of its Act, has the sole right to issue banknotes of two rupees and above, and it also puts the Government's coins and one rupee notes into circulation as the Government's agent.

Options A, B and D are all currency notes of denominations above one rupee, so they are printed and issued by the Reserve Bank and bear the Governor's signature and the promise to pay the bearer. This is a question about who issues, not about who circulates, and that distinction is the whole trap.

The correct answer is C, six. The Committee was created by the amendment of the Reserve Bank of India Act in 2016. Three members come from the Bank, namely the Governor as chairperson, the Deputy Governor in charge of monetary policy and an officer nominated by the Central Board, and three are appointed by the Central Government. Every member has one vote, the Governor has a casting vote when the votes are equal, and the Committee must meet at least four times in a year.

Option A, four, is the minimum number of meetings in a year and also the quorum for a meeting, so it is put here to confuse those two numbers with the strength. Option B, five, and option D, eight, match no provision of the Act. Remember that the decision is a committee decision, not the Governor's alone, which is the reform this amendment brought about.

The correct answer is B, lender of last resort. It is the classic central bank function: when a bank is solvent but short of cash and neither the market nor other banks will lend to it, the Reserve Bank lends against eligible securities so that a local shortage does not turn into a general panic and a run on deposits. The marginal standing facility is one modern form of this window.

Option A, banker to the Government, describes keeping the accounts of the Union and State Governments and making payments on their behalf. Option C, custodian of foreign exchange, describes holding and investing the country's reserves under the Foreign Exchange Management Act, 1999. Option D, manager of public debt, describes issuing Treasury Bills and dated securities, paying interest on them and redeeming them. All four are real functions of the Bank, but only one fits the description in the question.

The correct answer is A. Since 1957 India has followed the Minimum Reserve System of note issue, under which the Reserve Bank must keep assets worth at least two hundred crore rupees against the notes in circulation, of which gold must be worth at least one hundred and fifteen crore rupees and the remainder may be held in foreign securities. The system replaced the earlier proportional reserve system and allows the note issue to expand with the needs of a growing economy instead of being tied to a fixed proportion of bullion.

Option B understates both figures. Option C overstates them. Option D is wrong because the reserve is not held wholly in gold; only the smaller gold component is fixed, and the rest may be in approved foreign securities. The pair of numbers is what papers test, so learn them together.

The correct answer is B, the Payment and Settlement Systems Act, 2007. It makes the Reserve Bank the designated authority for the regulation and supervision of payment systems in India, so that no person may operate a payment system without its authorisation. Real Time Gross Settlement, the National Electronic Funds Transfer system and the retail systems run by the National Payments Corporation of India all work under this framework.

Option A, the Banking Regulation Act, 1949, governs the licensing, capital, management and inspection of banks themselves. Option C, the Negotiable Instruments Act, 1881, governs cheques, bills of exchange and promissory notes, including the offence of dishonour of a cheque, and it is the strongest distractor because cheques are a means of payment. Option D, the Companies Act, 2013, governs the incorporation and management of companies in general.

The correct answer is B, 1937. The Reserve Bank opened at Calcutta in 1935 and moved its central office permanently to Bombay two years later, which is where the Governor sits and where policy is announced. The Bank also has four Local Boards, for the western, eastern, southern and northern areas, with headquarters at Mumbai, Kolkata, Chennai and New Delhi.

Option A, 1935, is the year the Bank began operations, at Calcutta and not at Bombay. Option C, 1949, is the year of nationalisation, when ownership passed to the Government of India, and involved no change of office. Option D, 1955, is the year the State Bank of India was constituted out of the Imperial Bank of India. Three of these four years are real milestones, so the question rewards a candidate who has tied each year to the right event.