RBI Functions — Set 1

Correct Answer: D. Hilton Young Commission

• **Hilton Young Commission** = formally called the Royal Commission on Indian Currency and Finance, it was set up in 1926 to study India's monetary system and recommended establishing a central bank to separate currency management from the government. • **1935** — Acting on the commission's 1926 report, the RBI was established on 1 April 1935 under the Reserve Bank of India Act, 1934, initially as a privately owned institution. • The commission was chaired by Edward Hilton Young (later Lord Kennet), a British MP, and its recommendation gave India its first independent monetary authority. 💡 Option A (Narasimham Committee) is wrong because it was set up in 1991 to reform the banking sector, not to create the RBI; Option B (Chakravarty Commission) is wrong because it reviewed the monetary system in 1985, decades after the RBI was founded; Option C (Vaghul Committee) is wrong because it dealt with money-market reform in 1987, unrelated to the RBI's establishment.

Correct Answer: B. Kolkata

• **Kolkata** = the RBI's central office was established in Kolkata (then Calcutta) when it opened on 1 April 1935, because Calcutta was the commercial capital of British India and the seat of financial activity. • **1937** — the central office was permanently shifted to Bombay (now Mumbai) in 1937, where it remains today; Mumbai is now India's financial capital and hosts the Governor's office. • The shift reflected the growing importance of Bombay as India's trade and financial hub after independence was on the horizon. 💡 Option A (Mumbai) is wrong because Mumbai became headquarters only in 1937, not at the RBI's founding in 1935; Option C (Chennai) is wrong because no RBI headquarters was ever located there; Option D (Delhi) is wrong because Delhi hosts only a regional office, not the central office.

Correct Answer: D. Section 22

• **Section 22** = of the Reserve Bank of India Act, 1934, grants the RBI the sole right to issue bank notes of all denominations in India — this monopoly ensures uniformity and public trust in the currency. • **Exception** — the Rs. 1 note and all coins are issued by the Government of India (Ministry of Finance) under the Coinage Act, not by the RBI, making them a government liability rather than an RBI liability. • Notes issued under Section 22 are liabilities of the RBI backed by assets held in the Issue Department, which is kept separate from the Banking Department. 💡 Option A (Section 28) is wrong because Section 28 deals with lost, stolen, or imperfect notes; Option B (Section 18) is wrong because Section 18 covers emergency purchases of bills of exchange; Option C (Section 24) is wrong because Section 24 specifies the denominations of banknotes, not the right to issue them.

Correct Answer: B. C.D. Deshmukh

• **C.D. Deshmukh** = Chintaman Dwarkanath Deshmukh was appointed the first Indian Governor of the RBI in August 1943, breaking a line of British governors who had headed the bank since its founding in 1935. • **1943** — he was appointed by the British colonial government and later served as India's Finance Minister (1950-1956), playing a key role in post-independence economic policy. • Deshmukh also represented India at the 1944 Bretton Woods Conference, which led to the creation of the IMF and the World Bank. 💡 Option A (L.K. Jha) is wrong because he was the 13th Governor (1967-1970), not the first Indian one; Option C (Manmohan Singh) is wrong because he served as the 15th Governor (1982-1985), many decades later; Option D (I.G. Patel) is wrong because he was the 14th Governor (1977-1982), not the first Indian.

Correct Answer: D. Providing emergency liquidity to banks

• **Providing emergency liquidity to banks** = as the lender of last resort, the RBI stands ready to lend to commercial banks that cannot raise funds from any other source, preventing solvent-but-illiquid banks from collapsing. • **Mechanism** — the RBI extends emergency credit against eligible collateral (government securities) through the Marginal Standing Facility (MSF) or special repo windows, typically at a penal rate above the market rate. • This function, first articulated by Walter Bagehot in 1873 ('lend freely at a high rate against good collateral'), is practised by all central banks to prevent bank runs from cascading into systemic financial crises. 💡 Option A (providing loans to general public) is wrong because the RBI does not lend directly to individuals — it lends only to banks and the government; Option B (regulating foreign direct investment) is wrong because that is a policy function under FEMA, not the lender-of-last-resort role; Option C (printing unlimited currency) is wrong because the RBI follows the Minimum Reserve System and cannot print currency without limit.

Correct Answer: C. Cash Reserve Ratio (CRR)

• **Cash Reserve Ratio (CRR)** = is a quantitative (general) credit-control tool because it directly affects the total volume of money in the banking system by fixing the proportion of deposits banks must park with the RBI in cash. • **Qualitative tools** — Rationing of Credit, Margin Requirements, and Moral Suasion are qualitative (selective) because they control the direction and purpose of credit rather than its overall quantity. • Other quantitative tools include SLR, Repo Rate, Reverse Repo Rate, and Open Market Operations — all alter the aggregate money supply, not just its sectoral allocation. 💡 Option A (Rationing of Credit) is wrong because it limits credit to specific sectors, making it a qualitative tool; Option B (Margin Requirements) is wrong because it prescribes the minimum own-contribution a borrower must bring, targeting the use of credit and thus qualitative; Option D (Moral Suasion) is wrong because it involves persuasion and advice, a non-statutory qualitative instrument.

Correct Answer: D. Foreign Exchange Management Act (FEMA), 1999

• **Foreign Exchange Management Act (FEMA), 1999** = replaced FERA (Foreign Exchange Regulation Act, 1973) and empowers the RBI to manage India's foreign exchange reserves, regulate forex transactions, and maintain the external value of the rupee. • **2000** — FEMA came into force on 1 June 2000; unlike FERA it treats forex violations as civil offences rather than criminal ones, reflecting the shift to a more liberalised economy. • Under FEMA, the RBI intervenes in the foreign exchange market by buying or selling dollars to prevent excessive volatility in the rupee exchange rate. 💡 Option A (Companies Act, 2013) is wrong because it governs corporate registration and governance, not foreign exchange; Option B (Banking Regulation Act, 1949) is wrong because it deals with regulation and supervision of banks, not forex management; Option C (SARFAESI Act, 2002) is wrong because it deals with securitisation and recovery of non-performing assets, unrelated to forex reserves.

Correct Answer: A. Four

• **Four** = the RBI Act, 1934, permits the appointment of up to four Deputy Governors to assist the Governor in managing the RBI's diverse functions; the RBI currently operates with four Deputy Governors. • **Composition** — by convention, two Deputy Governors are career RBI officers, one comes from the commercial banking sector, and one is an economist; all are appointed by the Central Government. • Each Deputy Governor oversees specific departments such as monetary policy, financial markets regulation, banking supervision, and currency management. 💡 Option B (Three) is wrong because the Act permits four, not three; Option C (Two) is wrong because two is far below the statutory maximum of four; Option D (Five) is wrong because the RBI Act cap is four, not five.

Correct Answer: D. Buy or rediscount bills of exchange from banks

• **Buy or rediscount bills of exchange from banks** = the Bank Rate is the standard rate at which the RBI is willing to purchase or rediscount eligible bills of exchange and government securities from commercial banks — it is the official rate for long-term credit. • **Alignment** — since 2012 the Bank Rate has been aligned with the Marginal Standing Facility (MSF) rate, currently set 25 basis points above the Repo Rate; it is used mainly to calculate penalties for SLR/CRR defaults by banks. • Unlike the Repo Rate, which involves overnight lending against securities with a repurchase agreement, the Bank Rate traditionally applies to longer-maturity instruments without a repo clause. 💡 Option A (issue new shares to investors) is wrong because the RBI does not raise capital by issuing shares to the public; Option B (borrow from commercial banks) is wrong because that is the function of the Reverse Repo Rate; Option C (lend to the general public) is wrong because the RBI does not lend directly to individuals or corporates.

Correct Answer: A. Reserve Bank of India

• **Reserve Bank of India** = under Section 22 of the Banking Regulation Act, 1949, the RBI is the sole authority empowered to grant a licence to any entity wishing to commence banking operations in India. • **BR Act, Section 22 (1949)** — the RBI evaluates capital adequacy, promoter credentials, business plan, and public interest before issuing a licence; it can also cancel or suspend a licence if a bank violates regulations. • Recent examples include the RBI issuing 'in-principle' approval to new private sector banks in 2014-15, following recommendations of the Nachiket Mor Committee. 💡 Option B (Finance Ministry) is wrong because the Ministry recommends policy but does not issue individual bank licences — that power vests solely with the RBI; Option C (IBA - Indian Banks' Association) is wrong because IBA is a representative body for banks, not a regulator with licensing powers; Option D (SEBI) is wrong because SEBI regulates capital markets and securities, not banking operations.