Money and Banking in India: RBI, Supply and Policy

The correct answer is A, 1 April 1935. The Reserve Bank of India was constituted under the Reserve Bank of India Act of 1934, on the recommendation of the Hilton Young Commission, and started functioning on 1 April 1935 with its central office at Calcutta, which was shifted permanently to Bombay in 1937.

Option B, 1 January 1949, is the date on which the Reserve Bank was nationalised and passed from private shareholders to full government ownership, so it is a real date but answers a different question. Option C, 1 July 1955, is the date on which the Imperial Bank of India was converted into the State Bank of India. Option D, 19 July 1969, is the date on which fourteen large commercial banks were nationalised. All four dates appear together in option sets, so learn them as a group with the event attached to each.

The correct answer is C, M3. M3 is M1 plus time deposits with banks, and it is called broad money or the aggregate monetary resource. It is the measure the Reserve Bank follows most closely because it captures both spendable balances and funds held for a fixed term.

Option A, M0, is reserve money or high-powered money, made up of currency in circulation, bankers' deposits with the Reserve Bank and other deposits with it; it is the base on which credit is created, not broad money. Option B, M1, is narrow money, being currency with the public plus demand deposits plus other deposits with the Reserve Bank, and it is the most liquid measure. Option D, M4, is M3 plus total post office deposits other than national savings certificates, and it is the widest but least used measure. The ranking by liquidity runs M1, M2, M3, M4, from most to least liquid.

The correct answer is B, the Reserve Bank lends short-term funds to banks against government securities. In a repurchase or repo transaction a bank sells government paper to the Reserve Bank and agrees to buy it back shortly afterwards at a slightly higher price; the difference works out as interest at the repo rate. It is the main operating instrument of monetary policy, and a rise in it makes borrowing costlier for banks and so for their customers.

Option A describes the lending rate charged to customers, which banks fix themselves under a benchmark framework laid down by the Reserve Bank. Option C describes the reverse repo rate, the rate at which the Reserve Bank absorbs surplus funds from banks, which is always below the repo rate. Option D is the savings deposit rate, which banks are free to decide. Keep repo and reverse repo the right way round by remembering that in a repo the Reserve Bank gives money and in a reverse repo it takes money.

The correct answer is C, Fourteen. On 19 July 1969 the government nationalised fourteen of the largest commercial banks in the country, the aim being to take banking to rural areas, direct credit to agriculture and small industry, and end the concentration of bank funds in a few business houses.

Option A, six, is the number of banks nationalised in the second round in April 1980, so it is a correct figure attached to the wrong year. Option B, twelve, does not correspond to any round of nationalisation and is put in only as a near miss. Option D, twenty, is the total of the two rounds taken together, fourteen plus six, and is the trap most often chosen. Read the year in the question carefully, because papers ask the same fact as 1969, as 1980 and as the combined total.

The correct answer is C, the Government of India. The one rupee note and all coins are issued by the Government of India through the Ministry of Finance, and the one rupee note carries the signature of the Finance Secretary rather than that of the Governor of the Reserve Bank. The Reserve Bank acts only as the agency that distributes them.

Option A, the Reserve Bank of India, issues every currency note of a denomination above one rupee, and those notes carry the Governor's signature, but not the one rupee note. Option B, the State Bank of India, is a commercial bank and does no note issue at all, although it acts as an agent of the Reserve Bank in places where the latter has no office. Option D, the Security Printing and Minting Corporation of India, runs the presses and mints that physically print notes and strike coins, but printing is not issuing. The distinction between issuing and printing is exactly what this question tests.

The correct answer is B, 1949. The Reserve Bank began in 1935 as a shareholders' bank with privately held capital. Under the Reserve Bank of India Transfer to Public Ownership Act it passed into full government ownership on 1 January 1949, soon after independence, so that the central bank and the new government's economic policy would work together.

Option A, 1935, is the year the Bank was established and began operations, not the year of its nationalisation. Option C, 1955, is the year the Imperial Bank of India was reconstituted as the State Bank of India following the recommendation of the All India Rural Credit Survey Committee. Option D, 1969, is the year fourteen commercial banks were nationalised. Fix the chain in order: established 1935, nationalised 1949, State Bank of India 1955, bank nationalisation 1969 and 1980.

The correct answer is B, 1982. The National Bank for Agriculture and Rural Development was set up on 12 July 1982 on the recommendation of the committee headed by B. Sivaraman, and it took over the agricultural credit functions until then performed by the Reserve Bank and the refinance work of the Agricultural Refinance and Development Corporation. It refinances cooperative banks and regional rural banks rather than lending directly to most farmers.

Option A, 1975, is the year the first regional rural banks were set up under an ordinance, following the Narasimham working group, so it belongs to the same field but to a different institution. Option C, 1991, is the year economic liberalisation began and the Narasimham Committee on the financial system was appointed. Option D, 2005, is associated with the policy push for financial inclusion and no-frills accounts. Attach 1982 and the Sivaraman Committee firmly to NABARD.

The correct answer is A, kept as cash with the Reserve Bank of India. The cash reserve ratio is the share of a bank's net demand and time liabilities that it must maintain as cash balances with the Reserve Bank. The balance earns the bank nothing, so a rise in the ratio takes money out of the bank's lending pool and tightens credit, while a cut releases funds.

Option C describes the statutory liquidity ratio, which is held by the bank with itself in cash, gold or approved securities and does earn a return; this is the most common confusion in the chapter. Option B is wrong because banks cannot be required to hold reserves in company shares, which carry market risk. Option D describes priority sector lending, under which a prescribed share of adjusted net bank credit must go to agriculture, small enterprises, education, housing and weaker sections. Remember the one-line separation: cash reserve ratio with the Reserve Bank, statutory liquidity ratio with the bank itself.

The correct answer is C, State Bank of India. The Imperial Bank of India had itself been created in 1921 by merging the three presidency banks, the Bank of Bengal of 1806, the Bank of Bombay of 1840 and the Bank of Madras of 1843. Acting on the recommendation of the All India Rural Credit Survey Committee, the government converted it into the State Bank of India on 1 July 1955 so that a state-owned bank could extend banking into the countryside.

Option A, the Reserve Bank of India, is the central bank and was created separately in 1935; before that the Imperial Bank had performed some central banking duties, which is why it appears as a distractor. Option B, the Punjab National Bank, was founded in 1894 as the first bank started with wholly Indian capital and management and has an independent history. Option D, the Bank of Baroda, was founded in 1908 under the patronage of the Maharaja of Baroda and was nationalised in 1969. The chain to remember is presidency banks, Imperial Bank, State Bank of India.

The correct answer is A, two hundred crore rupees, of which one hundred and fifteen crore is in gold. Under the Minimum Reserve System, adopted in 1957 in place of the earlier proportional reserve system, the Reserve Bank has to hold assets worth at least two hundred crore rupees against the notes it issues, of which gold must account for one hundred and fifteen crore and the remaining eighty-five crore is held in foreign securities. Beyond that minimum the Bank may issue notes according to the needs of the economy.

Option B understates both the amount and the composition and ignores the foreign securities component. Options C and D invent figures and assets that have no place in the system; government bonds of the Indian government are not what the minimum reserve is defined in. The point of the change in 1957 was to free note issue from a fixed proportion of gold backing so that currency could grow with production and trade, and that reasoning is itself sometimes asked as a statement question.